In April 2012 Standard & Poor‘s, an American financial services company, downgraded its rating of the Indian economy from stable to negative. Now within three months, Fitch Ratings (a similar agency), has also downgraded its rating of the Indian economy from stable to negative.
Standard & Poor’s and Fitch Ratings, along with Moody’s Investor Service, make up the “Big Three” of credit rating agencies. In 2001, these three agencies held a combined market share of 95%. Although it is commonly complained that the dominance of The Big Three in the market is too high, the credit ratings that these three agencies give out are held in high esteem. In investment, the bond credit rating as it is known, measures the credit worthiness of a company’s or a government’s debt issues. These ratings range from AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, and BBB- all the way to CCC, DDD, DD, and D, with AAA being the highest grade and D being the lowest.
Both S&P’s and Fitch cite similar reasons for their decision to downgrade their ratings of the Indian economy—corruption, inflation, slow growth, and lack of government initiative and reforms.
Indian Financial Minister Pranab Mukherjee did not react in a reassuring manner to either of the downgrades. In April he responded defensively while in June he refused to acknowledge the credibility of Fitch’s rating, saying it was based on old data and did not take into account recent positive economic developments (what exactly these were, he did not clarify).
Meanwhile, financial advisor Kaushik Basu declared that the downgrade came as no surprise as there is a “herd mentality” among credit agencies. At the same time, he admitted that there is a lot of work to be done and that the next six months will be important for the Indian economy. The Finance Ministry says that despite the negative rating India will continue to be an attractive investment destination, and that the rating will not interfere with India Inc’s ability to borrow overseas.
Of the Big Three, Moody’s Investor Service is the only one to currently rate India as “stable” and that too might change soon, seeing as the Indian economy is floundering.
On June 11th, less than two months after cutting India’s rating—Standard & Poor’s declared that India could be the first of the BRICS nations (Brazil, Russia, India, China, and South Africa, a group of globally recognized emerging economies) to lose its investment grade status.
According to S&P’s India currently holds a rating of BBB-, which is the lowest investment grade rating. Along with Standard & Poor’s, which certainly seems to expect the Indian economy to continue to go downhill, Fitch Ratings also mentioned that over the next 12 to 24 months there might be a need to downgrade India’s investment grade rating.
Pranab Mukherjee, on the other hand, seems to be confident that the economy will turn around over the next few months.
The rupee has fallen almost 20 percent against the dollar in the past year, and one dollar is currently equivalent to around 55 rupees. This depreciation of the rupee has led to costlier imports and, in turn, higher prices.
The governor of the Reserve Bank of India has recently warned the government that inflation is above levels of tolerance, and the government is obdurately refusing to change rates. With all this happening, it doesn’t seem like Mukherjee’s statement is going to come true any time soon. Indeed, we might soon be hearing about Moody’s downgrading India, and then about India being the first of the BRICS to drop below a BBB-.
In order to escape these misfortunes, India needs to strengthen politically. As the credit agencies have correctly noted, the Congress, the main party, remains divided on most economic policies (such as Foreign Direct Investment) and this discord, along with the antagonism of the Opposition, has prevented any serious economic liberalisation or reforms. Failure to work on the political aspect of the issue and to focus solely on economic improvement will only lessen the world’s opinion of India as a developing economy and a key player in the future. So buck up, government. Buck up.
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