JUNKED

Junked

Standard and Poor’s  threat to cut India’s sovereign grade rating from BBB-, already the lowest amongst BRICS countries, to “junk” status, is to be taken seriously. They have already moved our BBB-rating from “stable” to “negative” last year.

If the junk rating comes about, and is supported by similar downgrades from other global credit rating agencies such as Moody’s and Fitch, it will balloon India’s external borrowing costs, put pressure on an already weak rupee, and greatly increase our alarming fiscal deficit. It will also reduce investment money flows into India and adversely affect our reserves.

S&P are very disappointed with India’s inability to implement reforms it has announced, and others long pending. It is also unhappy with the governance of India’s minority government, buffeted on all sides by unruly allies and outside supporters, many of whom have reservations about economic reform which seek to free the markets and promote competition. They may not be saying it plainly but the only business that has grown phenomenally over the last few years is the business of corruption. That too cannot be exactly confidence- building.

Some quarters have been suggesting that S&P is thinking of downgrading “emerging markets” such as India, so that investment funds coming to them will be redirected to the EU. These analysts fear that Greece is on the brink of economic collapse despite massive bailouts and draconian austerity measures. They also fear that if Greece collapses the “domino” effect is likely to break open the unified 17 member EU.

This talk of the EU breaking up has some truth to it because even the top three economies in it namely Germany, France, and Italy, are in difficulties. But there is little credibility to the idea that investments being made currently in emerging markets including future projections, if redirected to the EU will save it from collapse.

The numbers, as the saying goes, simply don’t add up. The mountain of debt and the stresses the banking system in the EU need much more money than the collective investment in BRICS and other emerging economies.

India anyway has seen a precipitous decline in FDI, projected at a 43% decline over the previous year and may top out at not more than $30 billion for the fiscal per a report to parliament. And our Finance Minister P.Chidambaram himself says we cannot absorb more than $50 billion per annum at present. China took in FDI of $253 billion in 2012 per OECD figures.

And the money that has been coming into the stock markets as FII, a paltry $11 billion so far this year, has been looking for short term gains. Our indices have been moving in a narrow band for several years now. The top 30 stock Sensex vacillates between 16,000 and 20,000 points, and the top fifty stock Nifty ditto, between 5,000 and 6,000 points. This means that with an eroding rupee and inflation factored in, the only profits to be had have to be on a very short time frame.

All of it, FDI plus FII into India, or indeed into BRICS,  is by no means more than a drop in the bucket for EU’s woes. The FDI, which is the rooted money that goes into factories and infrastructure in India has declined substantially. The liquid funds that come in via FII meagre and not here for long.

Meanwhile we languish at a 5% or so growth rate in GDP which is not enough to meet our needs. We are a country of a 1.21 billion people and in great need of huge infrastructure development and modernisation in our market operations.  It could be argued that a 1% growth in the EU or America in an already developed scenario has a bigger impact, than making do on a borrowed or deficit financing basis in a largely underdeveloped country like India.

Being reduced to “junk” status, if it comes about, “over the next one year” will be akin to a thumbs down from the international rating agencies. It will show scepticism that we can ever get a grip on our downward spiral.

This is to be viewed in the context of impending general elections in 2014 or sooner, which could throw up an unclear verdict. We might be saddled with a further weakened UPA III for example, a beholden, hemmed in BJP led NDA, or a highly unstable Third Front led government. Any of this type of outcome will not help us improve our economic conditions. S&P’s pessimism may have factored all this into its thinking.

Moody’s, for the moment, has asserted the India sovereign rating  is “stable” at Baa3 which indicates “investment grade”. However, they have said they may consider a downgrade if the fiscal deficit gets worse.

Fitch currently rates India at BBB-, its lowest investment grade, and like S&P, revised its outlook from “stable” to “negative in 2012.

India, on its part, has no choice but to show some growth and increase in investment or face being dragged down further.  And this means cutting interest rates sharply and encouraging business and industry in every way. It means cutting customs duties, tariffs and taxes. It means cutting subsidies. It means turning the page on Socialism and big government.

(870 words)

May 20^th, 2013

Gautam  Mukherjee