Ratings agency Standard Poor’s Monday said India could become the first emerging economy powerhouse to lose its investment grade credit rating.
In a report titled, Will India Be the First BRIC Fallen Angel?, a reference to Brazil, Russia, India and China being the fastest-growing emerging economies, SP blamed “slowing GDP growth and political roadblocks to economic policymaking” as just some of the factors India could lose its current standing.
India is now rated BBB-, one notch above speculative or what financial markets terms ‘junk’ levels, and the threshold where large pension funds can buy its bonds.
SP said it will be the Indian government’s reaction to potentially slower growth and possible economic shocks that will determine if its rating falls.
“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” said SP’s credit analyst Joydeep Mukerji.
SP first warned of a possible downgrade in April, because of India’s slowing economy.
However, it added the country remains in much better shape to withstand current global economic uncertainty than it was in the early 1990s, when it suffered a balance-of-payments crisis that caused a steep fall in the value of the rupee.
On May 31, India’s revealed economic growth slowed to 5.3 per cent in the January-March quarter, the lowest since 2003, and far less than expected, as the malaise in manufacturing and other sectors spread to ordinary Indians, who trimmed spending.
Not so long ago, Indian politicians claimed their economy could rival China’s and surge into double digit growth, lifting hundreds of millions out of dire poverty in the process.
Instead, India is mired in a deepening crisis of confidence. Asia’s third-largest economy is widely regarded as performing below its potential, but hopes have dimmed that the fractious ruling coalition will be able to push through tough measures that could unlock a rebound.
Inordinate delays in project approvals, energy supply, labour and land issues, and policy decisions that have frightened foreign investors have all weakened investment. India’s rising deficits and plunging currency — the rupee tumbled to a new lifetime low against the dollar Thursday — haven’t helped either.
India’s combined fiscal deficit has more than doubled from 4.1 per cent of GDP in fiscal year 2008 to around nine per cent now and the current account deficit is about four per cent of GDP.
Economists had cheered a hike in gasoline prices last month as a step toward controlling India’s fiscal deficit. The 11 per cent increase was the steepest rise in a decade.
Opposition parties, however, demanded that the government roll back the increase to check inflation, dimming hopes that New Delhi will be able to trim other subsidies, such as diesel, which would do far more to balance the budget.