Rating fall to hit investment in India

Rating fall to hit investment in India

BOMBAY (AFP): India's decision to give large pay rises to federal and state employees will hurt investment following the revision of the country's credit rating by the international agency Standard and Poor's, economists said yesterday.

Standard and Poor Inc. on Monday downgraded its sovereign credit rating on India from "positive" to "stable" due to the poor state of its "public finances."

A sovereign credit rating determines a country's ability to borrow in international capital markets.

The downgrade comes in the wake of large pay rises for federal and state government employees. New Delhi recently approved pay rises of up to 300 percent for central government staff, increasing its wage bill by almost two thirds to US$13.07 billion.

Economist Anindya Chatterjee, at the foreign brokerage Natwest Markets, said the downgrade was a blow, leading to less confidence in India by foreign investors while domestic firms seeking to raise money abroad would be seen as a greater credit risk.

"It will matter in investment decisions by overseas fund managers. The cost of funds for Indian companies will go up, while the quantum of funds coming to India will also go down," he said.

In the long term, said Chatterjee, "this will affect the growth of the economy."

However he added that he could understand the downgrading. "The fiscal deficit is rising. The huge chain of pay hikes will mean more state borrowing from the markets and this will choke out private borrowers from the market."

Economist Bidisha Ganguly, at the foreign brokerage W.I. Carr Securities Pvt Ltd, said small and medium-sized Indian companies would find the cost of their overseas borrowings going up.

"They will have to pay much more for their borrowings now," she said, blaming the downgrade on India's rising fiscal deficit. "Fiscal discipline is not likely to improve. This means tax reforms are unlikely to happen and this will slow down the economic reforms process," she said.

Standard and Poor said it expected "little, if any, further progress near term from efforts to strengthen India's public finances."

The agency said "substantial" pay rises for civil servants would accentuate pay pressures and impair the already-weak finances of state governments.

It also expressed pessimism about an economic recovery in the country.

"Given the absence of a substantial fiscal correction, a further improvement in India's economic growth, now running at about 6 to 7 percent annually, could also prove to be an elusive goal," it said.

Last year, India's credit rating had improved from "stable" to "positive".

A tax-cutting budget in February was widely acclaimed but much of that euphoria has since ebbed away as growth and government revenues have failed to pick up as expected.