Downgrading India

The latest statement by Standard and Poor's (S&P) that India faces "at least a one-in-three chance" of losing its sovereign grade rating of BBB-minus in the next 12 months would appear to be surprising to many but has been adequately justified by the rating agency. It said that risks to India's growth from stalled reforms in the parliament tilt the credit risks to the downside. The warning from S&P, which had cut the outlook on India's BBB-minus rating from stable to negative last year, came after parliament adjourned early amid apposition uproar over corruption scandals, which stalled the economic reform drive by Prime Minister Singh's minority government.
The big worry is that with the 2014 elections looming, Prime Minister is fast running out of time to complete his legislative reform agenda. However, the government was not happy with such a warning. The Finance Ministry responded that the government had taken strong steps to improve India's public finances, promote investment and revive growth and, as such, had been pitching for a ratings' upgrade. The Confederation of Indian Industry called S&P's economic outlook harsh, adding that the government was making efforts to rein in the ballooning current account deficit - the broadest measure of external sector accounts.
Whatever the authorities of India say, we are of the view that S&P's warning should be taken seriously. As is well known, India's BBB-minus rating is already the lowest in its BRICS peers including Brazil, Russia, China and South Africa and cutting it further would push up the country's borrowing costs as it would signal higher risk. The problem in India, however, is that there is almost always a consistent wrangling in the parliament over the nature and pace of reforms to get political mileage. Minority parties in the government are generally anti-reforms and voice it loudly to please the electorate back home though they may be inwardly convinced about their usefulness for the economy. Manmohan Singh's government is very keen to undertake bold economic reforms but has been hampered by the political process. For instance, it has opened up the retail and aviation sectors to wider foreign investment and partly freed fuel prices but is still striving to open the insurance and pension sector to more overseas investment and streamline industrial land acquisition to spur economic growth. Another worry is that India (Asia's third largest economy) may not revert to seven to eight percent growth levels notched earlier in this decade. India's growth rate was expected to be almost 5 percent for the last financial year to March, 2013, the lowest level in a decade, but the government expects to pick it up to six percent this year and was targeting for seven percent the year after.
Although S&P has issued the warning for a possible downgrade but nothing is yet certain. India has a long history on dithering or faltering on reforms but the economy has been doing well, thanks to a highly educated labour force, innovation and economy of scales despite red tape and entrenched anti-reform lobbies and vested groups. What would happen in the next twelve months is yet to be seen but the pressure for downgrading may ease due to higher growth rate this year and general tilt of the population towards a free economy and lesser intervention of the government in business affairs. In any case, it needs to be remembered that India has been a favourite destination for foreign investment and a slight downgrading would not make much difference in the flow of foreign investment, especially due to high level of foreign exchange reserves at the country's disposal. So far Pakistan is concerned, it should be satisfied with higher investment and growth in India since a prosperous neighbouring country is usually less violent and more co-operative to maintain its own economy in good shape.