SPOTLIGHT As election fever reaches a crescendo in India, debt rating agencies as well as voters have prepared long wish lists for the country’s potential policymakers.
Both Standard and Poor’s Ratings Services and Fitch Ratings in reports in the last week have suggested that whoever comes to power next month needs to ratchet up India’s commitment to fiscal responsibility by lowering subsidies and trying to trigger more growth by promoting economic reform and infrastructure spending. If a coalition unable–or unwilling–to do the right thing takes over in New Delhi, Indian debt could eventually be downgraded to junk.
Standard and Poor’s said a new batch of smart leaders could convince it to upgrade its negative outlook on India’s BBB- rating, which is its lowest investment grade.
“The outlook (on the debt rating) could revert to stable if we believe that the agenda (of the next government) can restore some of India’s lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy,” it said.
However, the rating could be relegated to speculative grade–or junk–in the next year or so if the next government doesn’t appear capable, the rating company warned.
Last week Fitch made similar recommendations, asking that India’s new leaders focus on inflation and fixing the impediments in India’s economy.
Inflation can be controlled “through the use of a transparent and clear monetary policy framework and tackling structural impediments to lower food price inflation,” Fitch said.
Fitch also rates India just a notch above junk, but it has a stable outlook on its rating.
Prime Minister Manmohan Singh’s coalition government has been trying to avoid a ratings downgrade for years as slow growth has weighed on revenues and billions in subsidy spending have threatened to exacerbate India’s already-wide budget deficit. Meanwhile India has been struggling to reduce its dangerously high current account deficit and inflation rates.
While there are some indications that the worst may be over as the country has been able to keep its budget deficit in check and may at last be emerging from a painful period of stagflation, the next government will have to maintain the momentum.
India needs to accelerate its infrastructure development by approving and promoting more private-sector company participation in the modernization and expansion of its national networks of roads, ports and power plants.
“The Indian government can address key infrastructural bottlenecks in the economy if it can revitalize investment spending,” said Standard and Poor’s. “Regulatory changes to encourage private sector participation in infrastructure projects and promote competition in domestic sectors could also lift growth potential.”
India also needs to slash its subsidy bill by making the politically unpopular decision to reduce the huge amount it spends giving away inexpensive food and fuel.
“India’s food subsidy program currently poses a threat to fiscal stability,” Standard and Poor’s said.
To boost revenues, India needs to simplify its tax system by at last implementing a national goods and services tax. The introduction of the GST alone could boost India’s economic growth rate by 0.9 to 1.7 percentage points. To turbo charge growth India needs to revamp its economy by tearing down the barriers to competition and reducing the government’s participation and interference in some industries.
Sujan Hajra, chief economist at Anand Rathi Securities, said he doubts India will be downgraded to junk any time soon but he will be watching whether India can continue to keep its inflation, fiscal deficit and current account deficit from ballooning. He said an unstable government or flare up in negative indicators could convince the hot money to leave India again which could lead to a downgrade.
“My worry is that the capital flows India has received in recent months could easily reverse,” he said.
The rating agencies are letting it be known that they will be watching carefully to see how many wishes on their lists are granted, said Samiran Chakraborty, chief India economist at Standard Chartered Bank.
“Rating agencies have kept the situation fluid,” he said. “They are also waiting to see what happens to India’s fiscal situation.”
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