There has been a lot of speculation for many days now that credit rating agencies would downgrade India ratings.
The revision to the local currency Outlook is based on a considerable deterioration in the central government’s fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, Head of Asia Sovereign ratings.
Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09 based in part on higher on-budget subsidies, interest payments and public wages. The agency expects bonds issued to oil and fertiliser companies to reach at least 2% of GDP this year, implying an underlying central government deficit of 6.5% of GDP or higher.
The markets reacted and fell across all kinds of markets.
The higher fiscal deficit has been one of the weakest links in Indian economy for a long time and there is no surprise. I also calculated the off-balance sheet items and clearly it makes the entire fiscal deficit much larger than reported.
However, what is ironical is Fitch downgrades India but we don’t have any mechanism to downgrade Fitch itself? I am sure Moody’s and S&P will follow as well and we all know their role in the recent sub-prime mess. Should these ratings continue to be so important that they lead to a bloodbath in markets? The markets clearly seem to be valuing them still despite they failing time and again to safeguard the markets.
I had some more thoughts. Just imagine Fitch sayinga after a few years that India downgrade on this date was due to a modelling error!!
On a serious note, I also didn’t see any of the anchors on various business television channels raise the issues pertaining to these credit rating agencies. Why couldn’t anyone say shouldn’t the raters set their house in order first? Instead. there was a big hue and cry over the entire downgrade.
I am not saying that fiscal deficit is not a problem. It surely is but again, it has always been a problem with India. Still the foreign money kept poring in.