What has S&P said about India?
A new report dated June 8, 2012 has raised fresh questions over India’s economy, which is hit by high government borrowing, rising imports and political compulsions that have stalled reforms in key areas.
What has it said in the report?
In a report titled “Will India Be The First BRIC Fallen Angel?”, S&P has warned that India ran the risk of losing its “investment grade” status and erode its attractiveness as a global business hotspot.What, according to the report, is the biggest roadblock for achieving faster growth in India?
The report blamed a “divided leadership at the Centre” as one of the biggest hurdles for ushering in economic reforms to spur growth and boost investments. The division of roles between politically powerful Congress party president (Sonia Gandhi) and an appointed Prime Minister, has weakened the framework for making economic policy in India, it said. The agency added that 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, which he favours and constantly advocates in his public speeches, it said.
What has the report said on the current pace of economic reforms in India?
The report said that the combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward, away from economic liberalisation in the event of unexpected economic shocks.
How has the government reacted to the latest S&P report?
The government dismissed S&P’s contention that India could be the first BRIC nation to falter and fall below investment grade in the ratings. (see De-Coded: Credit Rating)
What about other BRIC countries?
Among the four BRIC countries, India has the lowest credit rating and is the only one with a negative outlook. Russia and Brazil have ‘BBB’ long-term foreign currency ratings and China has an ‘AA-’ rating, and all three have stable outlooks. China was the first BRIC sovereign to receive an investment-grade rating from Standard & Poor’s (in February 1992), followed by Russia (in January 2005), India (in January 2007), and Brazil (in April 2008)
Didn’t S&P comment on India’s economy in April as well?
In April, the agency had maintained India’s rating at BBB-, which is just a notch above “junk” that carries a higher risk of default by the government. But it had downgraded India’s credit outlook to negative in a sign that the government maybe on a dangerous course towards borrowing beyond its capacity to repay. A further downgrade would mean the Indian government would have to pay higher interest rates on its public borrowing.Why is the timing of report so critical?
The report comes as India’s macroeconomic managers struggle for solutions to deal with a string of economic crises as mirrored in recent data that confirmed signs of a crippling industrial slowdown.
What has recent data showed?
India’s economy has slowed to a growth rate of 5.3% in the last quarter of 2011-12, the slowest since 2003-04. Factory output data for April, released on Tuesday, confirmed that the slowdown persists. Factory output grew by a flat 0.1% during the month
What is pulling down growth?The manufacturing sector, which accounts for 80% of India’s industrial output, has slowed down considerably. It grew by 0.1% in April. Companies are seeking to cut corners to stay afloat, as rising input costs and costlier borrowing have forced firms to defer planned investments, offering lesser number of jobs and lower salary hikes. Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans, hurting job prospects. Companies have pruned wage bills to cut corners in difficult times, offering lower salary hikes that barely take care of rising prices.