Citing economic slowdown and political roadblocks to policy-making, rating agency S&P on Monday warned India could become the first BRIC nation to lose its investment-grade rating.
Standard & Poor's, which in April cut its outlook to negative on the country's sovereign rating of BBB minus in April, released a report titled, “Will India Be The First BRIC Fallen Angel?”
"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," S&P's credit analyst Joydeep Mukerji said in the report.
S&P had upgraded India to investment grade BBB rating in January 2007, after four years of above nine percent growth.
BRIC refers to the high-growth economies of Brazil, Russia, India and China. The other three BRIC members enjoy a higher rating or outlook than India's at present, S&P said.
The report comes at a time when some commentators are wondering if the `I' in BRIC now stands for Indonesia, which has been delivering good growth in recent times.
The government responded to the threat by saying it is taking steps to deal with economic issues like fiscal deficit and current account deficit.
Finance Secretary R.S. Gujral said when asked about his comments on the threat of S&P to lower India's investment-grade rating.
India’s economic growth has fallen to a nine-year low of 5.3 percent for the three months ended March 2012, while the overall growth for fiscal year 2011-12 stood at 6.5 percent, lower than the 6.7 percent clocked during the peak of the 2008 global financial crisis.
“Failure to advance with more liberalization might reduce India's long-term growth potential and thus hurt sovereign rating,” the S&P report said, wondering if “there is a risk that economic liberalization may not just stall, but could even recede?”
However, on the brighter side, the S&P report negates the anxiety expressed in some quarters that the country may face a 1991-like crisis, saying the country is better placed to see through the current times.
“Despite its recent problems, the Indian economy remains in much better shape to muddle through the current period of heightened global uncertainty than it was earlier, especially in the early 1990s, when it suffered a balance of payments crisis," it says. It pointed out that over India has $250 billion in forex reserves and a floating exchange rate that gives scope for adjusting to global shocks.
Many policy-makers, including Planning Commission deputy chief Montek Singh Ahluwalia, have said the country will not drop from the trend and growth will continue to be in the 6-7 percent range and will eventually regain 8-9 percent levels.
However, S&P also pointed to a "remote" scenario of growth falling to 4-5 percent levels if the weak economic management coincides with a bad external shock or with bad luck, such as a poor monsoon.
"The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition," the S&P report said.