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S&P-Report-Will India Be the First BRIC Fallen Angel_June2012

S&P-Report-Will India Be the First BRIC Fallen Angel_June2012

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Published by Kevin Cohen

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Published by: Kevin Cohen on Jun 11, 2012
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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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slowdown (in 2008). However, a perceived slowdown in government decision-making, failure to implementannounced reforms, and growing bottlenecks in key sectors (including lack of reforms to archaic land acquisitionlaws that hinder investment) has undermined business confidence. And infrastructure problems, combined withgrowing shortfalls in the production of coal and other fuels, have dampened investment prospects.For example, various regulatory and other obstacles have delayed a proposed $12 billion investment in the steelsector by Korean steelmaker POSCO--potentially the biggest foreign investment project in Indian history--by morethan seven years. Other steel projects have also faced extensive delays because of land acquisition hurdles and otherissues.Recent setbacks in economic policy have also hurt investor sentiment. Strong opposition from within the Congressparty-led ruling coalition, as well as from opposition parties, recently forced the government to reverse its decisionto raise the cap on foreign direct investment (FDI) in multibrand retail to 49% of total ownership from 26%.Similarly, pressure from a coalition ally of the governing Congress party caused the government to roll back a 10%hike in passenger train fares and forced the Railway Minister to quit. (Passenger fares have been flat for many yearsdespite substantial growth in personal income and high inflation.)In addition, recent announcements by the government on taxation matters, such as the retrospective implementationof taxation on the offshore transaction of assets in India, have raised concerns among foreign portfolio and directinvestors. (The Finance Minister later clarified his statements and announced that some of the measures against taxavoidance would not take effect until the next fiscal year, starting in April 2013.) Such incidents have raised theperception of risk among both foreign and domestic investors and could reduce India's growth prospects in thecoming years.
Is Economic Policy At A Turning Point?
These developments raise larger questions: Are the recent years of rapid economic growth over? India enjoyed GDPgrowth averaging 8.7% during 2004-2008 and 7.8% during 2009-2011. Will India return to a lower level of trendgrowth over the next three to five years, or can it recover to levels close to its impressive growth rates of recent years(adjusted for cyclical factors, such as global growth trends)?Moreover, is there a risk that India will go backwards in its economic policies and undo some of the progress it hadmade to liberalize its economy since the early 1990s? The government could react to lower GDP growth and greatervulnerability to economic shocks by tightening fiscal policy and liberalizing the economy. Or, it could potentiallyroll back some of the policies that had opened the economy and created a greater role for market forces and privateinvestment.Indian officials have consistently stated that while economic reform may be slow because of the political realities of a largely poor, diverse, and democratic country, it could only go forward. But is there a risk that economicliberalization may not just stall, but could even recede?Such a retreat might be in line with the more interventionist economic policies many developed countries pursued inresponse to the recent global economic crisis. However, India's economic conditions differ greatly from those of developed countries, and its economic performance has been remarkably successful since liberalization began.Failure to advance with more liberalization might reduce India's long-term growth potential and thus hurt its
974408 | 300928109
Will India Be The First BRIC Fallen Angel?

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