Half Empty Or Half Full?

How have the Indian reforms fared at the economic stakes? Is the Indian economy in a bad place and vulnerable to a downgrade (according to S&P) or is it the right place to invest (Deutsche Bank) which has performed better than China (according to HSBC)? The blitzkreig of measures (some truly much needed) undertaken by the new "old man in a hurry" Prime Minister Manmohan Singh, fighting a last battle against policy paralysis, have somehow failed to yield the expected results.

It appears to be a glass 'half-full-and -half-empty' situation with different perspectives colouring the conclusions. US Treasury Secretary Timothy Geithner and US Fed Reserve chairman on a two-day visit to India have been suppotive of the new drive to reform the economy, saying it will spur growth in private investment and income. Sitting beside P. Chidambaram, whose appointment as India's finance minister in August helped trigger the rash of reforms, Geithner said the new policies offered "a very promising path to improving growth outcomes for the Indian economy".

India's Reform Drive To Draw Investment  

Looming Credit Rating Downgrade
But the foreign rating agencies continue to be divided in their opinion. India still faces a one-in-three chance of a credit rating downgrade over the next 24 months, says Standard & Poor's, although a series of reform steps launched in September had slightly improved the country's prospects. The S&P announcement coming a day after the IMF slashed the country's growth forecasts for 2012 to 4.9 per cent, dampened the market sentiment with the sensex plunging over 160 points on 10 October.

S&P's credit rating for India is BBB-, one notch above junk grade and the lowest investment rating in the BRICS grouping of big emerging economies. S&P had lowered India's rating outlook to negative from stable in April.

"A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," the ratings agency said in a report dated 9 October and released on 10 October.

S&P analyst Kim Eng Tan said the reform measures had helped in "slightly" revising S&P's view on India's rating. "Right now we do see that government has taken some actions which we didn't expect initially. To some extent that has helped to revise slightly our views of credit downgrade," said Tan.

S&P  also affirmed its negative rating on seven public sector banks in India. The banks on which S&P has affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings include Bank of India (BOI), Indian Overseas Bank (IOB), Indian Bank, State Bank of India (SBI), Syndicate Bank and Union Bank of India (UBI).

The S&P has further revised the stand-alone credit profile (SACP) of SBI to 'bbb-' from 'bbb' and that of UBI to 'bb+' from 'bbb-' based on anticipation of the banks' weak asset quality performance.

Why India Still Looks Good
While S&P and IMF have managed to dampen immediate market sentiment, Deutsche Bank on the other says investors should continue to buy Indian equities. According to the bank, its India Risk-Love index is at a neutral from being in a mild panic in May. It even welcomes the high rate of twin deficits (current account plus fiscal deficit), saying  such a situation creates ground for policy reforms, just like it has done now. "Prospective returns from these diabolical twin deficit levels are exceptionally good".

Also, return on investments (ROEs) and EBIT margins are in the lowest quintile in the last two decades and are likely to rise as prior under-investment, policy reforms, contained commodity prices from a slowing China, and increases in infrastructure spending kick in. The bank is gung-ho on the reforms and expects a continued slew of reforms, project approvals and possibly a budget next April that also surprises positively.

India Grew Faster Than China
An HSBC survey says economic growth in emerging market economies slowed in the July-September quarter on poor performance by the manufacturing sector, but India expanded more than China, an HSBC survey said.

The HSBC Emerging Markets Index (EMI) slipped to 52.1 in the third quarter this year, from 53.2 in the April-June period.

A relatively better performance from the services sector was offset by the poor performance of the manufacturing sector, as global demand softened.

However, among the big-four emerging markets, expansion in India and Russia were better than Brazil and China, HSBC said.

Although the HSBC EMI, which is based on PMI ( Purchasing Managers' Index) surveys conducted across the emerging markets, stayed above the 50-mark that differentiates growth from slowdown, HSBC noted that the global economic condition is posing strong headwinds for them.

Going forward, although manufacturing was mainly responsible for third quarter weakness, the longer-term outlook for the services economy deteriorated to its lowest level since the survey began in 2005.

Though the level of gloom about the future business outlook moderated among the big-four emerging market economies, Indian counterparts were the most confident, the HSBC survey said.

The taint of corruption has refused to leave the UPA 2 government. Despite all the measures to improve market sentiment, the latest DLF-Robert Vadra saga has again punctured the market sentiment. The prime minister today spoke about taking steps against corporates that fail to prevent bribery .

A thorough spring-cleaning may be necessary before people's faith is restored.