India needs a full policy makeover, not just incremental step-ups

From a foreign investors’ darling to a slowing economy prone to risky policy flip-flops, the turnabout of India’s image has been as rapid as the sizzling growth it had once peaked during 2004-08. Last week, Standard & Poor’s (S&P) maintained a “negative” outlook on the economy and cautioned that it could downgrade the country’s sovereign ratings if the next government does not appear capable of reversing India’s low economic growth.

The agency maintained India’s rating at BBB-, which is just a notch above ‘junk’ that carries a higher risk of default by the government, but placed the onus on the next government to turnaround the economy.

The negative outlook indicates that it may lower the rating to “junk” grade next year if the next government does not appear capable of reversing India’s low economic growth.

S&P’s commentary came days after Goldman Sachs projected a bullish run in India’s stock markets aided by budding recovery signs such as better corporate profitability and also a probable return of a BJP-led NDA in 2014. Critics, including credit rating agencies, investment banks and think-tanks, have pointed out that managing a restive alliance has consumed more time than prudent policy-making resulting in policy missteps that have stoked fears among investors.

In each of these annotations the phraseology is similar: stalled reforms, policy missteps, mounting deficits, galloping inflation, fractious politics and creaky infrastructure. The reports’ striking resemblances of the contents and their timing, expectedly, have drawn scorn from the government. There is this strand of thought, more dominant among official policy makers that question the reliability of investment banks themselves: do they have the expertise to comment on domestic political matters?

The don’t-read-too-much into these reports’ argument has its own set of merits, but it would still be prudent not to risk economising on facts, which, as recent data mirrors, appear intimidating.

India’s economic growth has crashed to 4.4% during April-June this year, the worst quarterly growth in four years. The RBI’s bitter medicine to raise interest rates to cure inflation has not tamed prices, but led to serious side effects on growth. Investors are keenly watching the signals that the government sends out about its reformist intent. As this paper has been arguing India needs not just incremental step-ups in diverse areas but a policy makeover. Unless that process begins, a cycle of upturns and slowdowns will continue — with more of new India’s people sliding back to the old.


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