Another rating downgrade warning from S & P, brings the Sensex down

NEW DELHI: Standard & Poor, the global ratings agency was in news, when it downgraded India’s credit rating a few months ago. Now, it’s hinting at yet another lowering of credit rating, if India fails to strengthen its external position, maintain good political climate and speed up fiscal reforms. Earlier in June, the credit rating agency had issued a similar warning. Though, the agency made it clear that that the warning was a part of the Asia-Pacific sovereign report card and there was no fresh analysis or development pointing to any urgent decision on credit rating downgrade. But, since the S & P enjoys a global reputation, just the mentioning of a previous analysis caused panic in the already volatile financial and political climate in India. As an obvious development, stock market tumbled by more than hundred points and rupee also nosedived. Reasserting its position on the grim scenario of Indian domestic policy, coupled with global economic slowdown, S & P stressed that investor confidence in India has decreased and its growth is negatively impacted. Furthermore, India is the only country in the Asia Pacific region, which has seen such drastic downgrading in its credit rating in the previous couple of months. Standard & Poor’s report is titled 'Asia-Pacific Sovereign: A Bit of Stability in the Sea of Uncertainty' and it highlights the grim economic scenario in the region amid the volatile and uncertain global economy. What panicked the Indian political and industrial stalwarts was the fresh threat of another possible downgrade within the next 24 months, if things did not improve. The likelihood of such a downgrade as estimated in the report was 33%. The threat perception magnified in the wake of recent political uncertainty and struggling UPA government with the fresh charges of corruption and scams. It was not as if the report was entirely negative, as it hinted at a possible reversal of the previous downgrade if the central government is able to reduce structural fiscal deficits and boost the investor confidence once again. They also expect Indian government to take concrete actions to increase GDP growth rate. The macroeconomic measures to reduce fiscal deficit include decreasing subsidies for fuel, fertilizers and agricultural produce. Levying an additional goods and services tax is also a possibility to immediately deal with this monstrous problem. Earlier these factors coupled with inflationary pressures on the economy had forced S & P to downgrade India’s sovereign rating from stable to negative. Though Indian government seems to be committed for the reforms needed, the opposition is using it as a weapon to destabilize the government, citing the financial pressure on the masses. The recent fuel and gas price rise and resulted hullaballoo by the opposition parties and withdrawal of support by a political faction from the state of West Bengal, which was earlier an ally of the government, suggests that the road of reforms is not easier for the government. Political groups in India are also opposing government’s decision to invite FDI in retail sector. A weak domestic and external demand has affected the projected growth rate in the current fiscal year to 5.5% against the 7% estimated earlier. The current sovereign rating of India is BBB (minus). According to S&P, the negative factors include the threat perception to foreign ownership reforms for the insurance and pension businesses and a 6% deficit (of GDP) in the current financial year. The agency also expected the RBI to take serious steps to curb rising inflation in the coming months before it gets uncontrollable.