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Economy Jun 11, 2012

S&P warning on India rating: Govt finally needs to wake up

By Firstbiz Editors

Slap! Another hit on the face for the government. It certainly needs one, given that all the previous slaps seem to have done little to wake Sleeping Beauty a.k.a the government from its deep slumber.

The latest to try and shake the government out of its self-induced stupor is international ratings agency Standard and Poor's, which warned that "slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment grade rating."

In its report titled "Will India be the first BRIC fallen angel?" it warned that India could become the first "fallen angel" among BRIC nations to lose its investment-grade rating.

Going that the government has done little so far, there's little reason to hope that it will be spurred into decisive action by S&P. Reuters

India's long-term sovereign rating is already 'BBB-', just one notch above speculative (junk) grade. So, a downgrade will mean junk status for India's sovereign ratings.In April, the ratings agency lowered the outlook on the country's ratings to 'negative' from 'stable' because of concerns over a growing fiscal and current account deficit as well as a lack of economic reforms.

Now, S&P says, "as the negative outlook indicates, we would consider lowering the credit rating if the government's policy response to these challenges, and potentially other unexpected shocks, is too little or too late."

Going that the government has done little so far, there's little reason to hope that it will be spurred into decisive action by S&P.

No action so far. Will the govt wake up now?

The truth is, the orange flashing lights of a slowing economy have been visible for quite some time now. The economy expanded by a mere 5.3 percent in the March-ending quarter, its slowest pace in nine years. Deteriorating business confidence, slow government decision-making, regulatory and other obstacles, and taxation proposals that have caused investors to rethink India as an investment destination have already raised the perception of risk about investing in India among both foreign and domestic investors. Persistent inflation, a falling rupee, a continuing high current account and fiscal deficit have added to those concerns.

Any government that wants to be in the reckoning for general elections in 2014 should already have been on the job of resuscitating the economy. This one isn't.

On Monday, an optimistic finance minister Pranab Mukherjee was quoted on CNBC TV18 as saying that he expected India's growth to come in at 7 percent for the year ending March 2013, and that the economy would 'turn around' this year. (The comment was made before the S&P report.)

He's probably the only one who still thinks that. Most experts now believe that the economy will not expand by more than 5-6 percent over the next few quarters. Almost no one is buying the '7 percent growth' idea any more. A poll by industry body CII also pegged GDP growth in the current financial year at less than 6.5 percent, based on the current slowing state of the economy.

Who's to blame?

The ratings agency clearly believes the government needs to shoulder a large part of the blame for those falling expectations.It notes the "momentum for economic reform has largely stalled in recent years as a result of political factors. The combination of a weakening political context for further reform, along witheconomic deceleration, raises the risk that the government may take modest steps backward away from economic liberalisation in the event of unexpected economic shocks."

It squarely blames the nature of leadership within the central government for the current political deadlock on economic liberalisation. "The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalisation of the economy," the report notes.

Furthermore, it adds that "the political context (and not lack of willingness among key economic policymakers in the central government and the central bank) may limit the government's ability to act decisively and quickly to manage an eroding economic environment and possible external shocks."

And that's the reality we have to live with. No wonder the Sensex crashed 225 points to close at 16,668 after news of the S&P report trickled into the markets. The rupee also fell 37 paise to 55.79 on the back of the report's release.

The report essentially articulates what we already fear. The question is, will the government accept this and take corrective steps? Or will the FM do what he usually does -ignore these complaints and hope for a normal monsoon and lower oil prices - to fix the economy?

by Firstbiz Editors

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