Will India Be The First BRIC Fallen Angel?
Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing itsinvestment-grade rating. Standard & Poor's Ratings Services revised its outlook on India's 'BBB-' long-termsovereign credit rating--which is one notch above speculative-grade--to negative from stable in April of this yearbecause of lower GDP growth prospects and the risk of erosion in its external liquidity and fiscal flexibility. Thenegative outlook also reflects the risk that Indian authorities may be unable to react to economic shocks quickly anddecisively enough to maintain its current creditworthiness.Economic growth has slowed in India in recent months, as it has in much of the world, and the country has sufferedmild erosion in its economic profile, with widening trade and current-account deficits. Its central government's fiscaldeficit exceeded official projections for the year ended March 31, 2012, reaching 5.9% of GDP. In addition,inflation remains stubbornly high despite the Reserve Bank of India's tightening policies in 2011 (although thecentral bank recently reversed its interest rate policies to help sustain GDP growth).
The revision of our outlook on India to negative reflects mild erosion in India's external and fiscal profiles and lower GDP growthprospects.
A return to recent high growth rates will depend on further fiscal reform and steps to improve the country's investment climate.
A tougher political setting for economic policymaking raises the risk that Indian authorities may not be able to react to negativeshocks quickly and adequately to avoid a loss of creditworthiness.
It remains to be seen whether the government would react to potentially lower growth and greater vulnerability to economicshocks by further liberalizing the economy or, conversely, by rolling back some of its earlier liberalizing policies, which hadexpanded the role of market forces and the private sector.
India's GDP growth fell to an estimated 5.3% year-over-year in the first quarter of calendar 2012, from 6.1% in theprevious quarter. The biggest contributors to growth in the last fiscal year were sectors such as real estate andfinancial and government services, with manufacturing, infrastructure, and agriculture showing lower growth. TheIndian rupee has declined about 20% against the U.S. dollar over the past year.In our view, setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growthprospects and, thus, its credit quality. How India's government reacts to potentially slower growth and greatervulnerability to economic shocks may determine, in large part, whether the country can maintain itsinvestment-grade rating, or become the first "fallen angel" among the BRIC nations (which include Brazil, Russia,India, and China).
Business Confidence Has Taken A Hit
Local business confidence in India has deteriorated for various reasons, including perceptions of "policy paralysis"within the central government. India was able to boost public and private investment in infrastructure in recentyears, sustaining high GDP growth of around 8%-9% during the three years leading up to the recent global
Standard & Poors
| RatingsDirect on the Global Credit Portal |
June 8, 2012
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