Foreign investors’ perception of India’s economic prospects is declining at an alarming rate. Moody’s Analytics, a sister organisation of credit rating agency Moody's Investors Services, last week lowered its 2012 growth projection for the country to 5.5% citing policy missteps, global turmoil and a poor monsoon. Moody's warning came on a day Indian industry reported yet another contraction in output and barely two months after the agency said its sovereign rating outlook for the country was stable. At that point it was the minority vote of confidence, with Standard & Poor's (S&P) and Fitch, the other two global rating agencies, having cut their outlook to negative. S&P set off the trend, warning in April that India faced a one-in-three chance of its rating being lowered to "junk" grade over the next two years unless growth revived, fiscally ruinous subsidies were reined in and the external environment improved. In June it amplified on this theme by suggesting India could be the first to drop out of investment grade among the BRIC (Brazil, Russia, India and China) emerging economies. Fitch followed this up by lowering its country outlook from stable to negative.
The Indian government need not be overly sensitive to credit appraisals because it hardly borrows abroad. The Centre and states among themselves soak up almost all the money households put into any form of financial savings. That forces Indian companies to dip into their profits or borrow abroad in order to grow. The crowding out shows up in factory output, which contracted by 0.1% in the first three months of this financial year. Capital goods, a proxy for industrial capacity addition, shrank by 27.9% in June, the steepest drop since the new index of industrial production was introduced. India's official reaction to the red flags from credit rating agencies — economic management will be driven more by domestic priorities than by external perceptions — does not incorporate the concerns of its industry, which must bear the additional cost of a downgrade through more expensive loans.
Prime Minister Manmohan Singh has warned the Congress about the consequences of India falling off the investment grade. The first statements by Mr Singh on taking temporary charge of the finance ministry and subsequently by P Chidambaram, who will hold the portfolio for considerably longer, display a shared concern about reviving investor sentiment. But the time for words is past, as the rating agencies are telling us. We can't afford to ignore the recurrent complaint of lethargy over politically sensitive reforms. The government is acutely aware of what needs to be done to get the economy back on track, it needs to focus on the intractable politics.