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End Of Incredible India
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Echoing the nascent fears, Standard & Poor's said on Monday that India could become the first of the so-called BRIC economies to lose its investment-grade status. This comes less than two months after the agency cut its rating outlook for the country.
Since India's long-term sovereign rating is already ‘BBB-', just one notch above speculative (junk) grade, a downgrade will mean junk status for India's sovereign ratings.
The rupee depreciated and stock markets fell after the comments from S&P. The rupee fell to 55.77 per dollar after having opened at 55.15. The Sensex fell more than 250 points to 16,627.
"Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating," the ratings agency said in its report --`Will India Be The First BRIC Fallen Angel?'
India's sovereign rating is BBB-, the lowest investment grade rating, and in April S&P lowered its outlook on the rating for Asia's third-largest economy to negative from stable.
S&P said the new report gave further detail as to why India's investment-grade rating could be at risk. The crux of the current political problem for economic liberalisation is the nature of leadership within the central government and not 'obstreperous' allies or an 'unhelpful' opposition, it said.
On its part, the government said that it is taking steps to contain fiscal deficit and the Current Account Deficit (CAD) (Read: Taking Steps To Cut Deficits).
"Government is taking lot of steps to ensure that Current Account Deficit (CAD) is under control, fiscal deficit is under control", Indian Finance Secretary R S Gujral said when asked about his comments on the threat of S&P to lower India's investment-grade rating.
"Setbacks or reversals in India's path toward 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 the report.
Standard and Poor's, which had lowered India's rating outlook to 'negative' from 'stable' in April, said the Congress party is divided on economic policies and there is substantial opposition within the party to any 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", it said.
The S&P said the division of roles between "a political powerful" Congress President and an "appointed" Prime Minister "has weakened the framework for making policy, in our view."
But instead of buckling up to tackle the task, the government's response has been usual. Dismissing concerns, Finance Minister Pranab Mukherjee said 2012-13 would be the turnaround year for the economy. He however, ruled out any fiscal sops to boost the sagging economy (Read: FY13 Turaround Year).
Addressing a conference of top officials of the Income Tax Department, he said steps are being taken to put India back on path of high economic growth.
"We are taking all necessary steps to ensure that we come back to the path of the targeted GDP growth. Of course it will take some time...but from this year we expect to make a turn around," Mukherjee said.
The so-called BRIC economies consist of Brazil, Russia, India and China.
On April 25, Standard & Poor's affirmed its 'BBB-' long-term sovereign credit rating on India but revised the outlook on the rating to negative from stable.
The outlook revision reflected at least a one-in-three chance of a downgrade in next two years if India's external position continues to deteriorate, GDP growth prospects diminish, or progress on fiscal reforms remains slow, it said.
Among the four 'BRIC' countries, India currently has the lowest credit rating and is the only one with a negative outlook. Russia and Brazil have 'BBB' long-term foreign currency ratings and China has an 'AA-' rating.
India has the lowest rating from S&P of all the BRIC countries, and is the only one with a negative outlook from the rating agency, it said in the report.
On the brighter side, the S&P report negates the anxiety expressed in some quarters that the country may face a 1991-like crisis, saying the country is better placed to see the current times through.
"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 1990s, when it suffered a balance-of-payments crisis," it says.
It points out over $250 billion in forex reserves and a floating exchange rate that give a scope for adjusting to global shocks.
Many policy-makers, including Planning Commission deputy chief Montek Singh Ahluwalia, have said the country will not drop from the trend and growth will continue to be in 6-7 per cent range and will eventually regain 8-9 per cent levels.
However, the agency also points to a "remote" scenario of the growth falling to the 4-5 per cent levels if the weak economic management coincides with a bad external shock or with bad luck, such as a poor monsoon.
"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 an unhelpful opposition," the S&P report says, contrary to the view that it is the allies that are blocking the reforms.
(With inputs from agencies)