The trigger for the recent S&P report appears to be the sharp drop in India’s quarterly GDP growth numbers and the drop in the value of the rupee.
The statement comes less then two months after the agency revised the outlook on India’s rating to negative from stable and said that the country has a one-in-three chances of being downgraded in the next two years. India presently enjoys a BBB- which is the lowest investment grade rating.
Making a pointed observation on Prime Minister Manmohan Singh’s government, S&P said, “It would be ironic if a government under the economist who spurred much of the liberalization of India’s economy and helped unleash such gains were to preside over their potential erosion.”
The trigger for the recent report appears to be the sharp drop in India’s quarterly GDP growth numbers and the drop in the value of the rupee.
“In our view, setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, thus, its credit quality. How India’s government reacts to potentially slower growth and greater vulnerability to economic shocks may determine, in large part, whether the country can maintain its investment-grade rating, or become the first “fallen angel” among the BRIC nations (which include Brazil, Russia, India, and China),” it said.
According to S&P, business confidence has been undermined by a perceived slowdown in government decision-making, failure to implement announced reforms, and growing bottlenecks in key sectors (including lack of reforms to archaic land acquisition laws that hinder investment). And, infrastructure problems, combined with growing shortfalls in the production of coal and other fuels, have dampened investment prospects.
“For example, various regulatory and other obstacles have delayed a proposed $ 12-billion investment in the steel sector by Korean steelmaker POSCO–potentially the biggest foreign investment project in Indian history–by more than seven years. Other steel projects have also faced extensive delays because of land acquisition hurdles and other issues,” S&P said.
The rating agency is concerned about recent setbacks in economic policy which have hurt investor sentiment.
“Strong opposition from within the Congress party-led ruling coalition, as well as from opposition parties, recently forced the government to reverse its decision to raise the cap on foreign direct investment (FDI) in multibrand retail to 49% of total ownership from 26%. Similarly, pressure from a coalition ally of the governing Congress party caused the government to roll back a 10% hike in passenger train fares and forced the Railway Minister to quit. (Passenger fares have been flat for many years despite substantial growth in personal income and high inflation.),” S&P said.
The rating agency has said that in a pessimistic scenario there is a risk that political problems could prevent the government from containing the growth in current spending, and lower-than-projected GDP growth could result in revenue shortfalls.
Politically inspired spending programs could further widen the fiscal deficit. “Lack of progress in alleviating bottlenecks in key sectors of the economy could lower both domestic and foreign investment levels. Fiscal slippage, combined with persistently high inflation, could further weaken investor confidence. Both the government’s debt burden and fiscal flexibility could continue to erode, in step with rising external vulnerability because of higher trade and current account deficits. India’s credit quality would suffer under such a scenario, and a downgrade could result,” the rating agency said.