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India’s ‘Big Bang’ Reforms Fail to Impress Ratings Agencies


The so-called big bang reforms unveiled by the Indian government to contain its budget deficit, boost growth and ward off a credit downgrade have failed to impress ratings agencies, with both Moody’s and Standard & Poor’s wary about the implementation of these new measures.

India, Mumbai, Gateway of India, view across harbor
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Last Friday, the Indian government announced a slew of long over-due measures to boost investment and prop up the rupee. These included allowing foreign direct investment (FDI) in broadcast, multi-brand retail and aviation, together with partial privatization of four state-run industries. This came on the heels of a cut in fuel subsidies a day earlier.

While these announcements saw Indian equities and the rupee rally, analysts at credit ratings agencies reacted to the good news with caution.

“The Indian government's recent announcement on foreign direct investments is encouraging, but at this stage it is still uncertain whether these measures can be implemented,” Standard and Poor’s Director of Sovereign Ratings, Takahira Ogawa, said.

Over the weekend, many political parties opposed these investor-friendly reforms as they perceive them to be anti-poor, giving rise to fears that the government may yet again be forced to roll back on these measures.

Atsi Sheth, Vice President, Sovereign Risk Group at Moody's Investors Service also has doubts over whether the government will go ahead and implement these reforms.

“The effect of the reforms on the government's credit profile is minimal because they are either too small to have material sovereign credit benefits or carry rollback risks that outweigh any credit positive benefits,” Sheth said.

The Indian government has a history of flip-flopping on policies in the face of political pressure. In December 2011, for example, the government unveiled plans for FDI in multiband retailing, only to back away from it days later.

While Moody’s has maintained its stable outlook on India, S&P and Fitch earlier this year cut their outlook to negative, warning that the country risks losing its investment-grade status if measures weren’t taken to better its investment climate and reign in the fiscal deficit.

While Sheth agrees the government’s recent efforts reflect a willingness to tighten its budget, the diesel price hike, for example, will have a limited impact on its  fiscal position.

According to Moody’s calculations, the move to cut fuel subsidies will reduce the government's fiscal deficit by just 0.1 percent in terms of its gross domestic product (GDP).

“We still expect a slowdown in government revenue growth and the high cost of food, fertilizer and fuel subsidies to cause the government to exceed its fiscal deficit target of 5.1 percent of GDP to 5.8 percent,” Sheth said.

He says a broader reform of the overall subsidy system would have a more positive impact on the country’s credit profile, but that is unlikely to take place anytime soon.

While the government’s move to lift the ban on foreign airlines from investing in domestic carriers is positive for the country’s private sector airlines, it will have minimal implications for the sovereign credit profile because it does not extend to the state-owned Air India, according to Sheth.

“Air India has drawn heavily on government financial support for its operations in recent years and measures to diminish that fiscal burden would be credit positive,” she said.

According to S&P’s Ogawa the economic impact from FDI in multi-brand retailing may also be less than expected, as it has been left to the state governments whether they want to implement it or not.

By CNBC's Ansuya Harjani