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Analysts, industry dismiss S&P ratings cut

International credit rating agency Standard and Poor's decision to downgrade the country's local currency debt ratings to "junk" was unjustified, a major industry group, economists and bankers said on Friday.

The rating agency cut the ratings on Thursday, blaming a swelling debt burden and vulnerable public finances and said continued big fiscal deficits and a "languid pace of economic reform would lead to a further ratings downgrade".

"Their statement about a possible downgrading in future on other parameters is untenable by facts," said Amit Mitra, secretary-general of the Federation of Indian Chambers and Commerce and Industry, a leading corporate lobby group.

The government bond yields eased in mid-morning deals after spiking higher in a knee-jerk reaction as investors took the cut in stride. "The factors being stated are all fairly well known," said M R Madhavan, research head at Bank of America.

India's economy is one of the world's strongest with record exchange reserves, low inflation and a record grain surplus, Mitra said, adding an economic slowdown had bottomed out.

S&P cut the long-term local currency rating sovereign rating to BB-plus from BBB-minus and the short-term rating to B from A3.

"This (move) is totally unjustified. All sectors of the economy are picking up. This is a pressure tactic to hasten divestment," said Bhagwan Das Narang, chairman and managing director of the state-run Oriental Bank of Commerce.

Doubts have surfaced about the government's privatisation drive after it delayed sales in two large oil companies for three months because of Cabinet differences over the sell-off campaign.

The government has said it expects the economy to grow at 5.5 per cent in the year to March 2003, putting it among the world's fastest-growing, but the rate would be still shy of double-digit levels needed to cut poverty levels.

While industrial output, exports and revenue receipts have picked up in recent months, India is also grappling with a yawning fiscal deficit and its worst drought in 15 years.

India has set a deficit target of 5.3 per cent of GDP for the financial year to March 2003, down from 5.7 per cent last year, but has consistently overshot the target in the past.

Some analysts say the deficit could widen as the government spends more on rural relief and rehabilitation. It also has yet to announce an estimate of the drought damage.

"Nothing has happened overnight to merit such a downgrade. The debt problem is not new and political differences have existed for some time now," said B B Bhattacharya, economist at the New Delhi-based Institute of Economic Growth.

"The big investors will take their own view."

"There is absolutely no macroeconomic rationale for this downgrade. In an environment where nations are struggling to achieve even three per cent GDP growth, India is well above five per cent", Ashok Soota, president, Confederation of Indian Industry, said.

Soota said it is believed the downgrading was driven by short-term factors such as delay in oil PSUs divestment and not based on any macroeconomic factors.

Strongly reacting to the rating, Association of Indian Chambers of Commerce and Industry, president K K Nohria said: "The rating is unfortunate, particularly at a time when the economy has started responding and signs of fresh investments are becoming visible."

Nohria said: "However, the confusing signals particularly on the divestment front will impact the flow of investment, domestic and foreign."

PHDCCI president Arun Kapoor said: "The downgrading has been done without fully comprehending the strength of Indian economy."

FICCI president R S Lodha said: "The downgrading of Indian local currency sovereign rating to below investment grade is only a cosmetic move which will not affect our international standing, since no foreigner operates in local currency debt."

(With additional inputs from PTI)

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