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Reform or perish, Standard and Poor's warns India

business Updated: Jun 12, 2012 00:53 IST
HT Correspondent

Here's more proof that the world is losing faith in, and patience with, the sputtering India growth story.

In a report titled Will India Be The First BRIC Fallen Angel?, US credit rating firm Standard and Poor's (S&P) on Monday warned that India ran the risk of losing its "investment grade" status, which will erode and, perhaps even spoil, its attractiveness as a global business hotspot and investment destination.

If that happens, India will be the first among the four emerging BRIC nations (Brazil, Russia, India and China) - that were projected as the world's future economic powerhouses - to be reduced to "junk" status.

"Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating," the report said.

India's economy has slowed to a growth rate of 5.3% in the last quarter of 2011-12, the slowest since 2003-04 amid concerns expressed by experts that that managing a restive alliance has consumed more time rather that prudent policy making.

The government dismissed S&P's contention that India could be the first BRIC nation to falter and fall below investment grade rating.

"This (S&P report) is not based on a fresh rating action…Between April 2012 and now, there are no significant events to indicate that the economy's vulnerability to shocks has increased, though growth numbers for the fourth quarter 2011-12 have been below expectations," finance minister Pranab Mukherjee said in a statement.

In April, the agency had maintained India's rating at BBB-, which is just a notch above "junk", which carries a higher risk of default by the government, but had downgraded India's credit outlook to negative in a sign that the government may be on a dangerous course towards borrowing beyond its capacity to repay.

The report blamed a "divided leadership at the Centre" as one of the biggest hurdles to ushering in economic reforms to spur growth and boost investments.

"The cabinet is appointed largely by Sonia Gandhi and leaders of the allied parties. Hence, the Prime Minister often appears to have limited ability to influence his cabinet colleagues and proceed with liberalisation policies he favours and constantly advocates in his public speeches," the report added.

"The division of roles between a politically powerful Congress party president (Sonia Gandhi) and an appointed Prime Minister has weakened the framework for making economic policy…," said the report, authored by Joydeep Mukherji and Takahira Ogawa, both economists at S&P.

Last week, the cabinet quickly bottled up a proposal to allow foreign investment in the pension sector fearing opposition from key ally Trinamool Congress.