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India may become first ‘fallen angel’ among BRIC countries

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NEW DELHI: The clouds over the Indian economy just got darker. Global ratings agency Standard & Poor's on Monday cautioned that India seriously risks losing its investment-grade rating, citing slowing growth and political roadblocks to economic policy making as some of the factors pushing up the risk for Asia's third-largest economy.

The S&P report, which is a follow-up to its April outlook revision, says India's ability to pull back from the edge will depend on the way the government handles potentially slower growth and economic shocks. That would determine whether the country can maintain an investment grade rating or become the first " fallen angel" among the BRIC nations - Brazil, India, Russia and China.

"Setbacks or reversals in India's path towards a more liberal economy could hurt its long-term growth prospects, and therefore, its credit quality," S&P's credit analyst Joydeep Mukerji said in a report titled, "Will India be the first BRIC Fallen Angel?" The report had its impact on the financial markets, hurting stocks and the rupee.

Reacting to the report, finance minister Pranab Mukherjee said the government was fully seized of the current situation and vowed that there would be a turnaround in growth prospects in the months ahead. He rejected the S&P report which warned that India could be the first BRIC country to falter.

In late April, S&P had revised the outlook on India's long term sovereign rating to negative from stable citing slowing growth, high fiscal deficit and debt burden and the government's inability to push through economic reforms. The agency had made it clear that its action was not a downgrade but a revision in the outlook based on the current economic situation. It maintained its BBB (minus) rating which is the lowest investment grade rating.

Any downgrade in the rating now will badly hit investor sentiment, increase overseas borrowing costs for companies and emerge as a risk for the Indian economy. Since the April outlook revision, a spate of economic data has drawn a gloomy picture. Growth in the January-March quarter slowed to a 9-year low of 5.3%, while food inflation hit double digits. Industrial growth remains sluggish and business confidence has taken a knock.

Overall, growth in 2011-12 has slowed to 6.5% from 8.4% in the previous year and below the government's estimate of 7%.

Launching a scathing criticism of the handling of economic policy, the S&P report says the risks surrounding economic policy arise from an unusual political situation in the country, not from an ideological movement against reform.

"There is little sign of a revival in public support for the statist economic policies that were pursued until 1992," the report says.

It adds that divided leadership at the Centre may be the biggest hurdle to further economic liberalisation. "The crux of the current political problem for economic liberalisation is, in our view, the nature of leadership within the central government, not obstreperous allies or unhelpful opposition," the report says."The Congress party is divided on economic policies. There is substantial opposition within the party to serious liberalisation of the economy. Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own."

The UPA government has dragged its feet on economic reforms and blamed the policy logjam on the opposition's hardline and its unwillingness to cooperate on approving key economic legislations. Strong opposition from allies such as the Trinamool Congress has forced the government to put on hold its decision to open up the multi-brand retail sector to foreign firms such as Wal-Mart, Carrefour and others. Trinamool boss Mamata Banerjee's opposition to pension reforms has stalled any progress while plans to raise railway passenger fares had to be reversed on her demand.

"The division of roles between a politically powerful Congress party president, who can take credit for the party's two recent national election victories, and an appointed prime minister, has weakened the framework of policymaking in our view," the report says."For example, Singh has been unable to liberalise the heavily controlled coal sector despite publicly advocating it for many years. The unusual division division roles and political power inside the central government has likely contributed to poor discipline and cohesion within the cabinet and government as a whole."

The report says the political context (and not lack of willingness among key economic policymakers in the central bank and the central bank) may limit the government's ability to act decisively and quickly to manage eroding economic environment and possible external shocks.

But the ratings agency had something to cheer for policymakers. It said that India is better positioned to weather the setbacks than in the past."Despite its recent problems, the Indian economy remains in much better shape to muddle through the current period of heightened global uncertainty than it was earlier, especially in the early 1990's, when it suffered a balance of payments crisis," the report said.
India may become first ‘fallen angel’ among BRIC countries Reviewed by sambasivan srinivasan on 6:31:00 AM Rating: 5

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