S&P Hurls a BRIC, Warns India may Lose its Rating

Poor Standard Rating agency says country may be first among emerging economies to be junked

Rating agency Standard & Poor's has warned that India is poised to earn the unwanted distinction of becoming the first BRIC nation that may be downgraded to junk status due to worsening growth, but the government insists the economy is on the mend. In an unusually direct reference to what it perceives to be poor quality of the nation's political leadership, S&P has expressed concerns that ballooning government expenses, widening trade deficit and political vacuum could lead to protectionist policies. 

Prime Minister Manmohan Singh, whom the agency described as "unelected", a reference to Singh's membership of the Rajya Sabha, is battling more with party colleagues over policy than with cantankerous allies often blamed for policy paralysis, the rating agency said. It fears that government policies, which in some instances are aimed to benefit what the report refers to as "politically well-connected firms", could result in a populist backlash against liberal economic policies. 
Heightened populism to counter the political fallout of corruption scandals could slow economic growth further, and weaken the already-battered fiscal position. 
As a result, India may become a 'fallen angel', after remaining the darling of global investors for nearly a decade, among BRIC nations. 
BRIC is a moniker coined by Goldman Sachs economists for the fastgrowing emerging economies of Brazil, Russia, India and China. 
"The crux of the current political problem for economic liberalisation is the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition," S&P said in a note on Monday. "The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalisation of the economy." Rupee and stocks erased gains after S&P's warning despite the fact that even a downgrade in future may not have much impact since the government borrows only in local currency and not US dollars. The rupee ended at 55.72 to the US dollar, off highs of 55.07. Setting House in Order: Govt 
Sensex fell 0.3% to 16,668, off highs of 16,893. In a statement late Monday evening, the government continued to maintain that it is acting to set the house in order. "There will be a turnaround in our growth prospects in the coming months," said Finance Minister Pranab Mukherjee. "RBI has reversed the interest rate cycle; mining sector growth has turned around; progress has been made on fuel linkage for coal-based power projects; there is a turnaround in the quarterly investment growth rate." 
The statement expressed surprise at S&P's pronouncements, pointing out that no substantive developments had occurred since April 25 when the rating agency reaffirmed its sovereign credit rating while saying the outlook for the $1.6-trillion economy had deteriorated to negative from stable. India's rating is BBB-, the last rung among investment grade ratings. 
Despite the government's protestations, global investors, rating companies and economists are turning edgy as inertia in policymaking due to allegations of corruption and lack of leadership are dimming hopes of any early economic recovery. High subsidies and welfare schemes have led to fiscal deficit ballooning to 5.9% last fiscal. S&P doubts whether this year's target of 5.1% could be achieved. Current account deficit is running at dangerous levels of 4% of GDP and quarterly economic growth has fallen to a nine-year low. "The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalisation in the event of unexpected economic shocks," the rating company said. But S&P may not just be looking at the growth rate, but an all-round improvement in the economy to withdraw the warning. "They are particularly focusing on not just the hope that economic growth can recover, I think they are also looking at the trade and current account deficit and budget deficit,'' said Robert Parker, senior advisor at Credit Suisse. "I think to prevent a downgrade, there has got to be a turnaround, particularly in the budget deficit and that is not apparent at the moment." Among other BRIC countries, S&P has rated Russia and Brazil as BBB, and China AA-. Crony capitalism, which has resulted in charges of corruption in the allocation of telecom licences and coal mining blocks, could result in popular anger against liberal economic policies. 
"Practices that in many instances are favourable for business, especially politically well-connected firms, are often misinterpreted in general public opinion as being pro-market, rather than pro-business," Standard & Poor's said. "Hence, public backlash against such abuses may erroneously result in a backlash against market-oriented policies." 
"Probably, the central bank could help in changing the outlook on India rating with an interest rate cut that could help revive economic growth rate. I think they are looking for growth to come back," says Samiran Chakraborty, head of India research at Standard Chartered. "So a rate cut can actually avert a rating downgrade by stimulating growth." 
The central bank meets on June 18 for the mid-quarter review of monetary policy, with few signs of efforts from the government on fiscal consolidation and policy measures to raise production that could ease inflationary pressures. "It would be ironic if a government under the economist who spurred much of the liberalisation of India's economy and helped unleash such gains were to preside over their potential erosion," said Standard & Poor's.

WAITING FOR TURNAROUND