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Posted by: Manjeet Kripalani on February 24, 2009
The Congress Party could finally be getting its come-uppance. Today, S&P revised India’s sovereign rating from stable to negative. Moody’s may follow suit. According to S&P, ‘India’s fiscal position has deteriorated to a level that is not sustainable in the medium term’.
The rating agency is right. The country’s fiscal deficit, combining those of the federal and state governments, is 12% - among the highest among the world’s large economies, according to a Feb 24 report by Morgan Stanley. India’s states are already profligate, but this time, it’s the central government that tipped the scales over. Two large, multi-billion dollar stimulus packages in the past few months have done little to spur the economy. Some of the monies went to support special interest groups, like the real estate lobby. India’s high cost of real estate has already served to undermine the country’s competitiveness. Trying to save the real estate sector is throwing good money after bad. And that’s just one example. There’s been little money set aside to do some real work – get the country’s creaking infrastructure working, and create sorely needed new roads, ports, cities and towns, schools, healthcare centers, power stations.
The downgrade has also affected the rating of India’s banks, mostly government-owned, and its state sector companies like the National Thermal Power Corp. Some of these are great companies – State Bank of India, HDFC Bank, and National Thermal, for example. But since their ratings can’t be higher than those of the sovereign, they’re tarred by the same brush. Ditto with India Infrastructure Finance Ltd, and the Export-Import Bank of India.
It’s terribly disappointing. Chetan Ahya, chief economist of Morgan Stanley Research Asia-Pacific and author of the Feb 24 report, says that India’s “recent strong economic growth (from 2004-08) had provided a great opportunity to correct the underlying deficit levels, building a buffer for down cycles. However the government has not implemented any major structural reforms to reduce expenditures…which is critical to achieving a sustainable reduction in the deficit.” Ahya believes the downgrade will affect the rupee, and result in its further depreciation. Not good news at all.
Don’t expect New Delhi to jump to attention and try and correct its wayward ways. It’s election season, and with national elections scheduled for April-May this year, it’s the time to be merry and give out largesse, so that the Congress can be voted back into power. Expect the Congress to be more spendthrift. Already, the newspapers are choc-a-bloc with full page adverts about the achievements of the various Congress Party ministries. New Delhi is so out of sync with reality, that it’s even taken credit for the Oscar-night successes of Slumdog Millionaire, claiming that it provided the “conducive” climate in India that made it attractive for director Danny Boyle to make the film in India.
BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporter Ian Rowley, Korea bureau chief Moon Ihlwan, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.