Key Concerns of S&P On India

The S&P report indicated that how the government reacts to the current slowdown – and any external shocks – would determine, in large part, whether India can maintain its investment-grade rating or, as the report put it, become the first fallen angel among the BRIC (Brazil, Russia, India, China) nations. India’s current sovereign rating is BBB- , one downgrade away from losing investment-grade status.

S&P is mainly worried about India’s falling growth and investment prospects, attributing it to low business confidence which, in turn, was attributed to the slowdown in government decision-making / Policy Paralysis, failure to implement announced reforms, rampant corruption, and growing bottlenecks in key sectors.

The S&P note explicitly stated that economic reform has not been advanced because of “internal strife [within the government], un-cooperative coalition allies, and an obstructionist opposition. It then went on to note that “divided leadership at the center may be the biggest hurdle” and discussed political constraints in considerable detail.

Our sense is that these events underscored the fact that no real progress has been made since the presentation of the Budget and likely prompted S&P to reinforce its concerns. To be sure, the one positive development since the April review is that crude prices have corrected more than 20%. If this were to sustain, it would go a long way in alleviating concerns on the current account deficit and some concerns on the fiscal deficit and inflation.

S&P comes in Open on Populist / Protectionist measures,

…senior Indian policymakers remain committed to liberalizing the economy and pursuing an increasingly market- oriented growth strategy.” However, it remained concerned that, “weakening political context for further reform, along with the economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks…

Instead, the bulk of the “to-do list” to revive investment falls under the ambit of the government. The last thing the Indian Government needs in the coming quarters is a ratings downgrade which may take us to 1996-97 kind of situation.