Posted by: Manjeet Kripalani on February 24
The Congress Party could finally be getting its come-uppance. Today, S&P revised Indias sovereign rating from stable to negative. Moodys may follow suit. According to S&P, Indias fiscal position has deteriorated to a level that is not sustainable in the medium term.
The rating agency is right. The countrys fiscal deficit, combining those of the federal and state governments, is 12% - among the highest among the worlds large economies, according to a Feb 24 report by Morgan Stanley. Indias states are already profligate, but this time, its 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. Indias high cost of real estate has already served to undermine the countrys competitiveness. Trying to save the real estate sector is throwing good money after bad. And thats just one example. Theres been little money set aside to do some real work get the countrys 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 Indias 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 cant be higher than those of the sovereign, theyre tarred by the same brush. Ditto with India Infrastructure Finance Ltd, and the Export-Import Bank of India.
Its terribly disappointing. Chetan Ahya, chief economist of Morgan Stanley Research Asia-Pacific and author of the Feb 24 report, says that Indias 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 expenditureswhich 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.
Dont expect New Delhi to jump to attention and try and correct its wayward ways. Its election season, and with national elections scheduled for April-May this year, its 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 its 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.
http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2009/02/sp_downgrades_i.html> 