S&P cuts outlook on India to 'Negative'; 'BBB-' rating affirmed

Standard & Poor's Ratings Services affirmed the 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India. Standard & Poor's also revised the outlook on the long-term rating to negative from stable. The transfer and convertibility assessment for India is unchanged at 'BBB+'. India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings. On the other hand, India's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings. India's external position remains resilient despite the deterioration in the past two years. The country's foreign currency reserves cover about six months of current account payments, down from eight months in 2008 and 2009. Similarly, the country's net external liability position has risen to about 50% of current account receipts, but more than half is related to foreign direct investment and portfolio equity flows, which are less problematic than debt in most scenarios. Currency flexibility also offers a buffer against volatile external flows.

High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock. Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors. The negative outlook signals at least a one-in-three likelihood of the downgrade of India's sovereign ratings within the next 24 months. A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow, Ogawa said. On the other hand, the ratings could stabilize again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate. Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertilizer subsidies, or an early implementation of the goods and service tax.


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Telecom shares tumble on TRAI proposals for 2G auction

Shares of Bharti Airtel, Idea Cellular and RCOM fell amid worries that the new gudelines proposed by telecom regulator TRAI for the auction of 2G spectrum will be financially damaging for the incumbent telecos. Companies will have to pay a minimum of Rs. 3,622.18 crore for every megahertz (MHz) in the 1,800 MHz band, which is around 10 times more than what companies such as Unitech Wireless, Swan and Shyam Telecom had paid for at least 4.4 MHz of all-India spectrum in 2008. A pan-India spectrum in the 1,800 MHz band will now cost Rs. 18,000 crore. This is around five times the base price of Rs. 3,500 crore for 3G spectrum auction. For spectrum in the 800 MHz and 900 MHz bands, TRAI has suggested a base price of Rs. 7,244 crore per MHz. Nine mobile phone companies lost their permits based on the Supreme Court order. However, only one company might get back its licence in the 2G auction since only 5 MHz is proposed to be auctioned this financial year. TRAI has also recommended "refarming" spectrum in the 900 MHZ band, immediately. In the recent past, GSM operators had jointly opposed ‘equal distribution’ of the 900 Mhz spectrum band. If TRAI’s proposal to ‘refarm’ the 900 MHz band is accepted, Vodafone, Bharti Airtel and Idea will have to shell out a total of Rs. 95,000 crore to buy back the spectrum they already own, reports said. The Cellular Operators Association of India - the GSM industry body - and the Association of Unified Service Providers of India - association of CDMA and dual-technology players - said in a joint statement that TRAI's recommendations had the potential to derail a sector that is a significant contributor to the national economy.

Reserve price for 2G spectrum is body blow to telecom industry: COAI & AUSPI

TRAI recommendations threaten mobile broadband rollout: GSMA

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