UPA Reforms Fail to Impress Rating Agencies

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The reforms taken up were mentioned as anti-poor by the parties in opposition, giving rise to fears that the government may yet again be forced to roll back on these measures. Even though Finance Minister P Chidambaram assured investors that there will be no roll-back of reforms, rating agencies are unconvinced.

The excise duty on petrol has been reduced by 5.3 per litre and diesel price are hiked by 5 per litre. These measures will reduce the under-recoveries by only 20000 crore- 25000 crore as high crude oil prices and a weak rupee will limit the impact of the government’s action, according to Crisil Reseasrch.

It said in a report, “Consequently, the reduction in under recoveries will have a marginally positive impact on oil PSUs and the government. Moreover, the diesel price hike is expected to lead to an increase in freight rates and profitability of transporters is unlikely to be significantly impacted.” The reform to cut fuel subsidies will decrease the government’s fiscal deficit by just 0.1 percent in terms of its GDP, according to Moody’s calculations. Fitch ratings said that the government has raised the amount of foreign direct investment permitted in a range of industries and, and resolving its long-running disagreement regarding multi-brand retail FDI, it has demonstrated some commitment to growth-enhancing reforms despite recent political deadlock. It added, “Broader concerns regarding the weak and inconsistent regulatory framework remain.” It also said, “Some plans, such as asset sales, appear insufficient to reach the government’s target. The government approved the sale of around 10% of four companies to raise Rs 15000 crore. This will leave the government the clear majority owner of all these companies and only raises half of the budgeted target for the next fiscal year of Rs 30,000 crore.”

Government’s decisions like lifting diesel prices, sale of part-stake in public sector companies and liberalization of foreign direct investment in the retail sector would have minimal effect on the country’s credit profile, according to Moody. The reason which they gave is that they are either too small to have material sovereign credit benefits or carry roll-back risks that outweigh any credit-positive benefits.

“We believe that the government’s recent announcement on foreign direct investments is an encouraging development, but at this stage it is still uncertain whether these measures can be implemented or not.” Similarly, on the proposed disinvestment of PSUs, he said, “It depends on the actual implementation of the plan” said, Takahira Ogawa, S&P Director for sovereign ratings in a note.