Global rating agency Standard & Poor’s has warned that India’s ratings may be lowered if fiscal consolidation is delayed further as high fiscal deficits are not sustainable in the medium term. S&P currently has a ‘BBB-’ rating — its lowest investment grade rating — on India with a negative outlook. This means any downward revision will reduce the rating to junk grade, which will affect foreign investors’ interest in India.

“India’s high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India (BBB-/Negative/A-3) may be lowered,” S&P said on Wednesday after reviewing the latest Union Budget proposals. Finance minister Pranab Mukherjee on Monday said that the fiscal deficit for the financial year through March 2010 is likely to be 6.8 per cent, sharply higher than 5.5 per cent estimated in the interim budget in February.

If India achieves fiscal consolidation in the next two to three years, the sovereign ratings on India could be maintained at ‘BBB-’ and the outlook revised to stable, S&P said. Mukherjee had said that he would strive to bring down fiscal deficit from 6.8 per cent projected for the current fiscal to 5.5 per cent next fiscal and 4 per cent during 2011-12. S&P further said that although the projected government budget deficit of 6.8 per cent of GDP for 2009-10 was high, almost the double of 2.7 per cent recorded in 2007-08, it was within its expectations. “Including state government deficits and off-balance-sheet items such as oil and fertiliser bonds, the deficit is estimated to reach about 12 per cent of GDP in fiscal 2009-2010,” S&P said.

... contd.