India Asset Sale, Deficit Cut Key to Retaining Investment Grade

March 5 (Bloomberg) -- India needs to contain its widening budget gap and implement changes including stake sales of state- run companies and easier rules for construction firms to keep its investment-grade credit rating, Standard & Poor's said.

The rating may be reviewed after the new government, which assumes office after parliamentary elections in April and May, unveils its economic policies, R. Ravimohan, S&P's managing director and regional head for South and Southeast Asia, said in an interview.

S&P last week lowered its outlook on India's debt rating to negative from stable, saying the country's deteriorating fiscal position was ``unsustainable'' in the medium term. The outlook cut came after India on Feb. 16 said its deficit for the year will rise to 6 percent, double its initial estimate. S&P had lifted India to the investment grade BBB- in Jan. 2007.

India has announced excise cuts and 200 billion rupees ($3.9 billion) spending since December as part of two stimulus packages to bolster an economy likely to grow at the weakest pace since 2003 and as Prime Minister Manmohan Singh's government faces elections. The government last year announced farm loan waivers worth as much as 717 billion rupees and gave 5 million civil servants a 21 percent pay rise.

The government could begin with an asset-sale program from its about $100 billion ownership in state-run companies, give construction firms greater access to bank funds to generate more employment, and help electricity generators get their dues, Ravimohan said.

Asset Sales

An asset-sale program can help in reversing a big slippage in India's fiscal consolidation and also raise funds that could aid the government give a boost to the economy, he said.

``China and other emerging economies have used privatization programs to raise money and improve the efficiency of these companies, and such programs have been beneficial for everyone,'' said Sam Mahtani, who manages $2.5 billion in emerging market funds as a director at F&C Investments in London. ``It'll be a challenge and will test the will power of top government ministers to push it through. It's an issue of managing a coalition.''

Investment in sectors such as power, education, medical services, pharmaceuticals and construction could generate good returns for India over the long term, and it should seek to remove ``bottlenecks'' from different sectors, Ravimohan said.

Construction for housing, roads and other infrastructure projects could generate large number of jobs in a nation that's likely to add up to 15 million to the workforce every year over the next three to four decades, he said.

`Relatively Strong'

Indian companies have cut half a million jobs in the quarter to December amid the global slowdown, according to the labor ministry.

``If there's a program that takes us through those positives, the rating will stay,'' Ravimohan said. ``The rating does take into account India's strengths, its diversities, size of the economy, growing young population, the relative strength of the domestic economy versus the foreign economy and therefore not getting hit as much as several other economies, the relatively strong banking system, and the cushions that are available to the government.''

The combined budget deficit of India's states and the central governments could rise to 13 percent of gross domestic product by March next year from a current estimate of 11.4 percent if the government doesn't initiate steps to rein in the shortfall, said Ravimohan, who was the managing director at S&P's Indian unit, Crisil Ltd., from 1994 to 2007.

``The next trigger is obviously going to be the new government and its policies,'' he said. ``In any case, the next budget will also set the tone.''

India's economy posted 5.3 percent growth in the quarter to Dec. 31 from a year earlier, with the farm sector sliding 2.2 percent. The $1.2 trillion economy may expand 5 percent to 5.5 percent in the year to March 31 if the declining trend in the farm sector continues, Ravimohan said. Growth could be between 6 percent and 6.5 percent if agriculture picks up, he said.