India may become 1st ‘fallen angel’ among BRIC nations S&P Cautions That It Could Lose Investment-Grade Rating

New Delhi: The clouds over the Indian economy just got darker. Global ratings agency Standard & Poor's on Monday cautioned that India seriously risked losing its investment-grade rating as slowing growth and political roadblocks to economic policymaking were among factors pushing up the risk for Asia'sthird-largest economy. 

    The S&P report, which is a follow-up to its April outlook revision, says India's ability to pull back from the edge will depend on the way the government handles potentially slower growth and economic shocks. That will determine whether the country can maintain an investment-grade rating or become the first "fallen angel" among BRIC nations—Brazil, Russia, India and China. 
    "Setbacks or reversals in India's path towards a more liberal economy could hurt its long-term growth prospects, and therefore, its credit quality," S&P's credit analyst Joydeep Mukerji said in a report titled "Will India be the first BRIC Fallen Angel". The report had its impact on the financial markets, hurting stocks and the rupee. 
    Rejecting the report which warned that India could be the first BRIC country to falter, finance minister Pranab Mukherjee said the government was seized of the situation and vowed that there would be a turnaround in growth prospects in the months ahead. 'India better positioned to weather storm than in past' 
New Delhi: Ratings agency Standard & Poor's, in its new report, has criticized India over policy paralysis. In late April, S&P had revised its outlook on India's long-term sovereign rating to negative from stable, citing slowing growth, high fiscal deficit and debt burden and the government's inability to push through economic reforms. The agency had made it clear that its action was not a downgrade but a revision in the outlook based on the current economic situation. It maintained its BBB (minus) rating, the lowest investment-grade rating. 
    Any downgrade in the rating now will badly hit investor sentiment, increase overseas borrowing costs for companies and emerge as a risk for India. Since the April outlook revision, a spate of economic data have drawn a gloomy picture. Growth in the January-March quarter slowed to a 9-year low of 5.3%, while food inflation hit double digits. Industrial growth remains sluggish and business confidence has taken a knock. Overall, growth in 2011-12 has slowed to 6.5% from 8.4% in the previous year and below the government's estimate of 7%. 
    Launching a scathing criticism of the handling of the economic policy, the S&P report says the risks surrounding the policy arise from an unusual political situation in the country, not from an ideological movement against reforms. "There is little sign of a revival in public support for the statist economic policies that were pursued until 1992," the report says, adding that the divided leadership at the Centre may be the biggest hurdle to further economic liberalization. "The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or unhelpful opposition," the report said. "The Congress is divided on economic policies. There is substantial opposition within the party to serious liberalization of the economy. Moreover, paramount political power rests with the leader of the party Sonia Gandhi who holds no Cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own," it added. 
    The UPA government has dragged its feet on economic reforms and blamed the policy logjam on the opposition's hardline and its unwillingness to cooperate on approving key economic legislations. Strong opposition from allies such as the Trinamool has forced the government to put on hold its decision to open up multi-brand retail to foreign firms. Trinamool boss Mamata Banerjee's opposition to pension reforms has stalled progress, while plans to raise railway passenger fares had to be reversed on her demand. 
    "The division of roles between a politically powerful Congress president, who can take credit for the party's two recent national election victories, and an appointed prime minister has weakened the framework of policymaking in our view," the report said. 
    But the ratings agency had something to cheer for policymakers. "Despite its recent problems, the Indian economy remains in much better shape to muddle through the current period of heightened global uncertainty than it was earlier, especially in the early 1990s when it suffered a balance of payments crisis."

S&P has said that paramount power rests with Sonia Gandhi who holds no cabinet position, but the government is led by an unelected PM