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S&P's downgrade not to affect govt borrowing

BS Economy Bureau in New Delhi

The finance ministry has said the Standard & Poor's downgrade of the Indian local currency debt would not affect the government's ability to borrow from the domestic market. India borrows largely from the domestic market and the primary dealers have full faith in the government's ability to manage its debt.

Senior finance ministry officials, however, said the flow of foreign investment into India might be affected. In its comments to S&P, India has stated that its public debt as a percentage of gross domestic product has remained the same during the past couple of years at about 57-58 per cent.

A finance ministry official said, "We told S&P that our borrowing programme is as per schedule and we are hopeful of meeting the budget targets on divestment receipts."

Officials said S&P had raised objections to the "below the line" accounting of divestment receipts-treating them as revenue, which is against international practice. The ministry has, however, told S&P that India traditionally followed such a practice.

A leading primary dealer said though the downgrade would not affect the government's borrowing programme, it would affect the debt market. "Last June when there was a downgrade, there was a steep fall in government security prices. There was pressure on the rupee also," he said. The dealer, however, said dollar inflows were strong now and there was ample liquidity in the system.

"Last year, after the downgrade, the recovery was very quick primarily because the Indian rupee is not convertible on the capital account," he added.

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