Is India’s Growth Story Over?

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Rajesh Nirgude / Associated Press

Investors watch a screen displaying Bombay Stock Exchange figures, BSE, in Mumbai, India.

Is India heading towards the end of its much-touted growth story? A report by global credit rating agency Standard and Poor’s (S&P) released on June 11 seems to suggest so. Titled “Will India be the first BRIC fallen angel,” the report cautions that India may become the first so-called “BRIC” (Brazil, Russia, India and China) country to lose its investment grade rating.

According to the report, slowing growth and political road-blocks in policy making could lead to Indian paper being relegated to junk bond status. The report notes that “the division of roles between a politically powerful Congress president who can take credit for the party’s two recent national election victories, and an appointed Prime Minister has weakened the framework for making economic policy.” It further warns that “setbacks or reversals in India’s path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality.”

S&P’s latest statement on India is in line with its earlier move a few weeks ago. In April, the agency had lowered India’s rating outlook from stable to negative and warned that further action would follow if India did not get its act together. India’s sovereign rating by S&P is BBB-, which is the lowest investment grade rating among the BRIC countries. It is also the only BRIC country with a negative outlook. S&P’s rating for China is AA- with a stable outlook. For Russia and Brazil, it is BBB with a stable outlook.

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S&P’s newest warning spooked the markets — the stock market went down and so did the rupee (although they did recover the following day) — but the government seems unfazed. In a statement, Finance Minister Pranab Mukherjee said: “Between April 2012 and now, there are no significant events to indicate that the economy’s vulnerability to shocks has increased, though growth numbers for the fourth quarter [of] 2011-2012 have come below expectations.” Barely a few hours before the S&P report was released, while addressing a function in New Delhi, Mukherjee had said: “I do not accept the prophecies of self-styled Cassandras that GDP growth will go down.”

How much of this is bravado — and what measures the government will take to get back on track — will be clear in the coming weeks and months. For now, there is not much to cheer about. India’s GDP growth for the January–March quarter at 5.3% was the lowest in nine years. For the year 2012-2013, growth estimates now are at around 6% — way below the 7.6% the government had projected at the beginning of the year. The country is also facing fiscal and current account deficits.

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According to Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business, the possibility of a downgrade by S&P is not surprising, since the India brand has been taking a hit on many fronts for the past several months. However, he is not convinced by the reasoning offered by the agency. “While there is indeed a slowdown on policy initiatives and growth has slowed down, the fact that a country [could lose] its rating because some of the anticipated things did not happen is a rather strange argument. Normally, a downgrade would happen because of adverse events rather than non-happening of positive events.” He adds that growth slowing down per se is not a risk factor. “While [slower growth] may reduce the prospects of future gains, it does not make the country more risky.”

At the same time, Chakrabarti believes that the move by the rating agency could be a timely warning for the government. “If the government wakes up [as a result of S&P’s warning] it will be great for the country and the economy. But of course to what extent the government reacts to it remains to be seen.”

Others, too, believe that S&P’s move could have an upside. “I see it as a positive development for the economy and the market. This will push the government to move faster on reforms, with the RBI (Reserve Bank of India) helping through rate cuts,” said Dharmesh Mehta, managing director – institutional equity at Enam Securities, talking to the daily newspaper Times of India. Samiran Chakraborty, chief economist and head of research at Standard Chartered Bank, told business daily Business Standard: “Getting growth on track assumes more importance than ever, and a pro-growth policy stance will be critical.”

Over to the Indian government.

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

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