S&P warns India on fiscal deficit, says rocky road ahead

NEW DELHI: International ratings agency Standard & Poor's on Wednesday cautioned that India's running high deficit could face more turbulence ahead, sending an ominous warning for the India that already has negative outlook on its barely investment grade sovereign rating.

"The road may be rocky in the near term, particularly for the largest deficit countries-India and Indonesia-but we don't think this is the Asian crisis all over again," said S&P report titled 'South And South-east Asian Economies Grapple With Growth And External Financing Risks.'

India's currency has fallen nearly 20% since April beginning following concerns the country will not be able to fund its record-high current account deficit, a concern exacerbated by the US Fed's threat of tapering its monetary stimulus.

S&P said the high current account deficit can be funded in normal times but things may be difficult when there is turbulence. "In times of normal risk appetite, this dependency may not be a problem. However, when markets become risk averse, economies with current account deficits often find themselves facing external financing pressure" the ratings agency said in a statement issued from Singapore.

In April last year S&P had lowered the outlook on India's sovereign rating to negative from stable, giving out one in three chance that it could be downgraded over the next 24 months.

India's current account deficit rose to $ 88.2 billion, or 4.8% of the GDP in 2012-13. The government has already outlined a plan to bring it down to $70 billion, or 3.7% of GDP and finance it fully with fresh capital flows.

S&P said the market turbulence was largely due to timing of "tapering" (lowering bond purchases) by the US Federal Reserve, which coincided downward revision in Asian GDP growth forecasts, most notably for China.

However, it said the turbulence was not a repeat of Asian Crisis.

"The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates. In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks," S&P's Asia-Pacific Chief Economist Paul Gruenwald said in the statement.