S&P warns India could lose investment-grade rating

Citing economic slowdown and political roadblocks to policy-making, rating agency S&P on Monday warned India could become the first BRIC nation to lose investment-grade rating.

Standard & Poor's (S&P), which had cut its outlook on the country's sovereign rating of `BBB-' to negative from stable in April, today released a report titled `Will India Be The First BRIC Fallen Angel?'

"Setbacks or reversals in India's path toward 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 the report.

S&P had upgraded India to investment grade BBB rating in January 2007, after four years of above nine per cent growth.

BRIC refers to the high-growth economies of Brazil, Russia, India and China. The other three BRIC members enjoy a higher rating or outlook than India's at present, S&P said.

The report comes at a time when some commentators are wondering if the `I' in BRIC now stands for Indonesia, which has been delivering good growth in recent times.

The economic growth fell to nine-year low of 5.3 per cent for the three months ended March 2012, while the overall growth for FY12 stood at 6.5 per cent, lower than the 6.7 per cent clocked during the peak of the credit crisis in the Western world.

"Failure to advance with more liberalisation might reduce India's long-term growth potential and thus hurt sovereign rating," the S&P

report said, wondering if "there is a risk that economic liberalisation may not just stall, but could even recede?".

However, on the brighter side, the S&P report negates the anxiety expressed in some quarters that the country may face a 1991-like crisis, saying the country is better placed to see the current times through.

"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," it says.

It points out over USD 250 billion in forex reserves and a floating exchange rate that give a scope for adjusting to global shocks.

Many policy-makers, including Planning Commission deputy chief Montek Singh Ahluwalia, have said the country will not drop from the trend and growth will continue to be in 6-7 per cent range and will eventually regain 8-9 per cent levels.

However, the agency also points to a "remote" scenario of the growth falling to the 4-5 per cent levels if the weak economic management coincides with a bad external shock or with bad luck, such as a poor monsoon.

"The crux of the current political problem for economic liberalisation is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition," the S&P report says, contrary to the view that it is the allies that are blocking the reforms.