Warning Signal

First there was shock, then annoyance and finally dismissal when Standard & Poor's (S&P) published its outlook on India on 25 April. S&P's report downgraded the outlook for the Indian economy to ‘negative' from ‘stable'. The timing of the report and its tone mystified most analysts and economists. On the one hand, the agency affirmed its positive long-term view on India; on the other, it listed a number of reasons why the medium-term scenario (the next two years) was under a cloud.

Think of the assessment as a triple D (not rating!): deficits, debt and decelerating growth. Yes, deteriorating public finances are a big concern, but looking at how they moved pre-Lehman crisis to 2010, the trendline has been steadily falling; there is no sudden shock or event.

Public debt is not in crisis mode either: at 75 per cent of GDP, it's not enough to trigger a negative outlook. If anything, public finances of several states have been steadily improving. The balance of trade — the current account deficit — is a problem, but export growth continues to be robust, diversifying substantially into Asia's strong markets from just the US and Europe.

And economic growth (per capita GDP growth at 5.3 per cent translates to 6.9 per cent economy-wide) is still relatively strong, even if it is slowing. The cynical point out S&P has been on a downgrading spree, and this is just the latest instance. But dismissing S&P, like the stock markets have, may also be an error.

(This story was published in Businessworld Issue Dated 07-05-2012)