Moody's cites multiple reasons for downgrade

By Our Special Correspondent

MUMBAI, AUG. 9. Moody's Investors Service (Moody's), another international rating agency, has lowered India's sovereign rating outlook by a grade. Standard and Poor's downgraded the rating outlook on the sovereign only on Tuesday.

Moody's has followed suit by revising the foreign currency country ceiling to stable from positive. Domestic currency debt rating has been lowered to negative from positive. Moody's stated that the changes reflect its concern that the long-anticipated deepening of macro-economic reforms has not materialised. Future implementation of the needed adjustments will be imperilled by the domestic and global economic slowdown and the fractured cohesion of the coalition Government.

The rating agency stated that the current and capital account inflows on the balance of payments (BoP) will be insufficient to prevent a further rise in the country's external debt liabilities. Even though the forex reserves and quite low short- term Government debt indicate a favourable liquidity position, there is no guarantee that the external finances are healthy.

Citing the Dabhol imbroglio, Moody's said lapses in contractual enforcement allowed by bureaucratic discretion, complex regulatory regime and infrastructure shortages have dampened foreign investor confidence. In the absence of significant foreign investment, non-resident Indian inflows and commercial debt-creating capital are now the major source of balance of payments support, which cannot be relied upon to provide financing on an on-going basis in all market conditions.

It also stated that a positive stance on the country's foreign currency ceiling is no longer appropriate as the diminished prospects for structural improvements in the Indian economy pose risks for the health of external finances. About the domestic debt, it said chronic failures to meet deficit targets, disappointing delays in privatisation of public sector undertakings, and growing contingent liabilities on off-budget appropriations have raised concerns that fundamental adjustments will only come in an atmosphere of crisis.

The recent episodes of Unit Trust of India and IFCI highlight the need to improve corporate governance at state-controlled institutions and the urgency is not limited to lowering the fiscal costs of recurrent public sector bailouts. In spite of their oft-declared appreciation of the difficult economic situation, policymakers appear to have missed an opportunity to execute the most important elements of the ``second generation'' reforms in the early years of the current administration. It stated that the additional downward pressure on the government's domestic currency rating arises from the absence of a coherent and realistic strategy to curtail the budget deficit and thereby reduce the public debt and debt service burden.

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Section  : Business
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