India: S&P’s negative outlook could be positive

Standard & Poor's negative outlook on India could turn out to be a positive, if it acts as a wakeup call for a government that has failed to make hard political choices.

On Wednesday, the US-based credit ratings agency lowered its outlook for India to negative from stable, citing the large deficit India has been running to finance social programs like the United Progressive Alliance government's signature National Rural Employment Guarantee scheme.

While that isn't the same thing as a downgrade of S&P's rating on India's sovereign debt, it does mean that there is "now at least a one-in-three chance of a downgrade sometime in the next 24 months, S.&P. said,” according to the New York Times.

Finance Minister Pranab Mukherjee quickly assured investors that there was no need to panic, India's Economic Times reports.

But he also hinted that he may try to leverage the S&P scaremongering to push through several long-pending economic reforms, some of which may alleviate the country's budget woes.

Mukherjee said he was confident that the government will be able to enact the Direct Taxes Code (DTC), a major tax reform, in the next Parliament session, according to the paper.

"Certain other legislations which have received the approval of the parliamentary standing committee will be taken up for considerations either in the later part of this session or in the monsoon session," ET quoted Mukherjee as saying.  

However, the Times of India reports the finance minister maintained a studied silence on cost-cutting measures that could have an immediate impact on the deficit.

…there was neither a mention of steps to prune fuel and fertilizer subsidies , nor was there a statement on making the foreign investment regime more liberal for insurance, banking, retail and aviation. Despite renewed fears of higher inflation, due to double-digit rise in the price of key food products, there was no talk of fresh measures, the paper reported.