The global rating agency Standard & Poor’s recently cut India’s outlook to negative from stable stating slow progress in reforms and worsening economic indicators. The agency has also warned of a downgrade of India in near future if the fiscal and current account situations and political atmosphere of the country do not improve. S&P’s credit analyst Mr. Takahira Ogawa has in a report, stated, “The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position in India continues to deteriorate, growth prospects diminish or progress on fiscal reforms remains slow in a weakened political setting.”
However there is no immediate threat over India’s rating being downgraded but the warning has sparked a nation-wide debate over any such eventuality in near future.
Economic Research Head of the State Bank of India Ms. Brinda Jagirdas says, “It is just a warning and not a downgrade. It only highlights the already existing economic concerns. There is no trigger for S&P to do it now. The move will not have any bearing on the cost of funds for either banks or the corporate because India has good savings and investment rates. Also, India’s fiscal deficit is much better than most of the European economies.”
But Ms. Brinda advices that the government needs to take immediate steps to reignite growth process and bring down subsidies and current account deficit.
Deutsche Bank in its report says,”If India’s growth recovers even slightly and inflation does not go up again, the lack of structural improvement in fiscal position need not be an immediate spoiler of the ratings outlook. But risks are surely not trivial.”
On the other hand, foreign investors are not as bullish on India as they used to be a few months ago because of policy flip-flop and government inaction. They are now concentrating on other growing markets (like gold) for better returns. At the same time, the US dollar is likely to become strong because of continued drift in Europe and the Indian rupee is expected to touch new lows in near future. These factors will make India’s imports more expensive and gold prices will shoot up further more.
The effect has already started showing with gold rates touching to Rs. 30,000/- per 10 gram for the first time after equaling the previous record of Rs. 29,540/- last week. Bullion analysts have predicted that the gold prices could rise over 15% within next 12 months because of uncertain economic environment in India.
But looking at the overall political scenario of India, major economic reforms in the country are not likely to happen before the next general elections in 2014. Also looking at corruption and scandals, decision making has slowed down because of factors such as bureaucracy not taking risks and the coalition nature of government.
The question now is whether the Indian economy really sound or is it deteriorating?
Chairman of the Prime Minister’s Economic Advisory Council Mr. C. Rangarajan finds the S&P’s action unwarranted and says, “It will have to upgrade India later this year” while Finance Minister Mr. Pranab Mukherjee terms it as a timely warning, but he is confident that the economy will be back on the growth path very soon.