International ratings agency Standard and Poor’s (S&P) delivered another blow to the Indian economy by warning that the Asian nation could become the first BRIC nation to lose its investment-grade rating. (BRIC refers to the economic group of Brazil, Russia, India and China.) In April, the ratings agency lowered its outlook on India’s long-term sovereign rating to stable from negative.
In a report titled “Will India be the first BRIC fallen angel?”, S&P said that “slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating.” India is currently rated ‘BBB-‘, which is one grade above speculative grade.
The ratings agency noted that local business confidence in India had deteriorated for various reasons, including perceptions of “policy paralysis” within the central government. “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) has undermined business confidence,” it said. “And infrastructure problems, combined with growing shortfalls in the production of coal and other fuels have dampened investment prospects.”
Along with taxation proposals that have raised concerns about India as an investment destination, the perception of risk among both foreign and domestic investors could reduce India’s growth prospects in the coming years.
The ratings agency warned that “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.”
The report highlights three key questions: Are India’s years of rapid GDP growth over? Will India go backwards in its economic policies and undo some of the progress it made to liberalise the economy since the early 1990s? And finally, is there a risk that economic liberalisation might not just stall, but actually recede?
Taking into consideration the economy’s current state of affairs, the report said that the situation does not merit a lowering of India’s sovereign rating just yet. “However, as the negative outlook indicates, we would consider lowering the credit rating if the government’s policy response to these challenges, and potentially other unexpected shocks, is too little or too late. Under such a negative scenario, there is an added risk that the government may further regulate the economy to reduce rising short-term threats to stability.”
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Rupesh Yatesh Dalal
Head Research Department
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