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S&P cuts India rating outlook on 'unsustainable’ deficit

The move came a week after the government unveiled a pre-election mini-budget which said the fiscal deficit for this financial year would be 6.0 percent of gross domestic product—more than double a target of 2.5 percent.

“The outlook revision reflects our view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term,” global ratings agency S&P’s credit analyst Takahira Ogawa said.

The revision came as the Congress-led government, whose mandate ends in May, cut factory levies and service taxes as part of fresh measures to boost demand and shield the economy from escalating global financial turmoil.

The ratings agency said while it had changed the outlook on the long-term sovereign credit rating to negative from stable, it had maintained its “BBB-” long-term and “A-3” short-term sovereign credit ratings on India.

“BBB-” is one notch above “junk” and considered investment grade.

The deficit slippage “calls into question” India’s commitment to reducing it, Ogawa said.

Acting finance minister Pranab Mukherjee has declared ”extraordinary economic circumstances merit extraordinary measures” and that Indians should not be “too obsessed” with cutting the deficit.

The lower house of parliament, meanwhile, passed the budget amid opposition charges the government was jeopardising the country’s financial health.

Mukherjee told parliament the higher deficit came against a backdrop of “unprecedented financial crisis” and warned India has yet to feel the “full impact of recession in other parts of the world.”

He announced a 200-basis-point cut in excise duties to eight percent on top of an earlier 400-point reduction. He also cut the service tax by 200 basis points to 10 percent.

“Our guess estimate of the total impact of the duty reductions so far (on government revenues) would be in the range of 100 billion rupees (two billion dollars) to 120 billion rupees,” said HSBC economist Manas Paul.

Several ratings agencies have expressed concern about India’s deficit but S&P’s move marked the first revision of the nation’s financial outlook.

The agency said it expected India’s total deficit, including central, state and so-called off-budget items, would be 11.4 percent of GDP in this fiscal year ending March 31, 2009, up from 5.7 percent in the previous year.

The government said it expects to rein in the deficit next year but S&P said it expected it to “remain high at 11.1 percent.”

“The fiscal deficit could widen if the next government implements another stimulus package,” Ogawa said. The government has already said another stimulus package may be needed on top of two previous ones.

The economy, which grew by nine percent last year, will expand 7.1 percent this year, the government says

It projects seven percent expansion for the next fiscal year, but economists say growth will more likely be around 5.5 percent.

Even that rate would be envied by most countries but the headline figure masks mass layoffs in the textile, gems and other export industries as well as in such labour-intensive sectors as construction.