Standard and Poor Rating on 19th September 2002 down-graded India's local currency sovereign rating to junk status and stripped the country of its investment grade on the ground of mounting debt, weakening finances of the public sector and disinvestments programme.

India's rating is also compared with other nations which is reproduced as under, which gives number of factors with regard to Debt to GDP, percentage of interest payment on current revenue, savings to percentage of GDP and investment of foreign direct investment.

India and its Peers : Poor Finance

Number of newspapers have written editorial on the above subject.

Indian Express in its editorial dated 21st September, 2002 observed as follows :

"Can one dismiss S&P's concerns out of hand? Unfortunately, no. S&P is basically saying that the country's political leadership, cutting across all parties, is failing to implement much-needed reforms at the appropriate pace. We can impute all sorts of motives to the agency's statement, but if we are honest with ourselves, we will admit that there is one simple rating to show how we fare vis-a-vis the rest of the world: the number of Indians lined up outside foreign embassies and vice versa. Today, most Indians who have the opportunity are happy to get out of this country, because they are convinced that their only hope of a significantly better quality of life lies in emigrating. How many foreigners try to become Indian citizens for that reason ?We have muddled along for years, and can happily continue to do so. But let's not be under any illusions - we can never retain top-notch performers if we persist with a second-rate system".

Unfortunately, Finance Secretary S. Narayan remarks saying that "it will not pose any danger to the economy", and avoided to take any steps to correct the danger posed by the rate of currency.

The Economic Times, in its editorial of 21st September, 2002 has observed as under :

"Consequently it is not so much the fact that we now share the honors with the likes of Costa Rica, El Salvador or Kazakhstan that should distress us. Rather it is that the downgrade from BBB(-) to BB(+) is a pronouncement of the internal community's disappointment with the government's performance, the set back in disinvestments, our mounting fiscal problems and worsening public sector finances. This is hardly surprising. The dissonance within the government on every conceivable policy issue seems to be growing by the day. What is particularly disturbing is that the latest downgrade comes just a year after the previous downgrade in August last year. In contrast, the country managed to hang on to its BBB(+) rating awarded in October 1998 for close to three years. The message is clear. Not only are we going steadily downhill, the descent is much faster than before. Hardly a good omen for a country that is home to a third of the world's poor."

Managing Director, John Chambers of Standard Poor Rating made a statement, "The local currency downgrade reflects the government's growing rupee debt burden and its ability to staunch the financial weakening of the public sector. The Government has been unable to curtail its growing budget deficit expected to reach 6 per cent of G.D.P. in current fiscal year. As a result, the consolidated debt of the Central and State Governments is estimated to exceed 80% of G.D.P. of this year."

Down grading of rupee and whether there will be internal debt trap for India is very well considered in the article published by Ila Patnaik in Business Standard dated 2/10/2002 of which the relevant extract is reproduced in order to support the contents of the book.

"But how likely is it that a fiscal crisis may occur? If what Finance Minister Jaswant Singh's first few weeks are anything to go by then, India will soon be pushed into an internal debt trap. The debt to GDP radio could become explosive and non-sustainable debt path. Already, India's debt dynamics are precarious. The combined central and state government debt stands at 70 per cent of GDP and puts India amongst the most indebted countries in the world. If the rate of interest paid on public debt is equal to the growth rate of GDP and the primary deficit - measured as the fiscal deficit minus interest payments - is zero. the debt to GDP ratio would remain constant. Thus with any borrowing the government does other than for paying the interest on public debt, ratio of debt to GDP rises.

Last year the average interest rate paid on public debt was 8.5 per cent. discounting for inflation, the real interest rate amounts to 5 per cent. This nearly equals the growth rate of GDP. In a situation when the real interest rate is as high as the GDP growth rate, the debt to GDP ratio can be prevented from rising only when the primary deficit is zero. Any addition to the fiscal deficit will only raise the debt GDP ratio.

If the debt to GDP ratio did not rise despite the primary deficits of the last few years, it was mainly because of falling interest rates and higher GDP growth rates. But with small savings already financing 20 per cent of the combined central and state deficit and with its share rising, reducing the total interest burden will also become a political decision.

In addition to the existing payment obligations of the government, is the rising pensions bill which stands at one per cent of GDP. The debt figure above also does not include guarantees provided by governments. The explicit guarantees provided by the central government stand at 4.2 per cent of GDP. For state governments the situation is even worse. While explicit guarantees stand at 8.1 per cent of GDP, implicit guarantees are yet to be measured. Only a few states have placed ceilings guarantees.

What is worse, as if the existing liabilities were not large enough, the government decided to give bailouts of UTI and later this could extend to IFCI and IDBI. These will raise the primary deficit to nearly 2.5 per cent of GDP, pushing up the debt to GDP ratio by the same amount and raising the changes of more bailouts.

The current trends, if they continue , as they are likely to, can only increase the probability of default and not reduce it. If such largesse continues it would not be too surprising if in the next round of rating India's rupee debt is further downgraded. Already institutional investors whose guidelines prevent them from investing in "junk" or speculative grade bonds are withdrawing from the Indian rupee debt market. It is time for Mr. Singh to sit up and take notice! "