Will BRIC Be BRC? S&P Threatens

The global rating agency, Standard and Poors’s (S&P), yesterday came out with its report titled “Will India Be The First BRIC Fallen Angel?” which stated that the slowing GDP growth and political roadblocks to economic policy-making could put India at a risk of losing its investment grade rating. The current S&P rating for India is BBB- with a negative outlook. One should distinctly recollect that S&P had, in April 2012, downgraded the outlook from stable to negative. For more information, refer to our Mindshare article titled ‘Rating Agencies Express Their Views On Indian Economy’.

The losing of the investment grade rating would make the India the first “fallen angel” among the BRIC nations (which are Brazil, Russia, India and China). One should note that only India has the lowest rating and is the only one having a negative outlook while the rest of the BRIC nations hold a stable outlook. Further, the rating of India is BBB- as against Brazil and Russia that have BBB and China with AA-, which all are better than India. Going ahead, India’s rating could move lower and probably go down one notch to BB+ which is considered as the highest speculative grade.

This was primarily after the March quarter GDP growth coming in at a meagre 5.3 per cent as against 6.1 per cent seen in the same period last year. Further, the rupee has depreciated by around 20 per cent against the U.S. dollar over the past year. According to the report, it remains to be seen whether the government would react to potentially lower growth and greater vulnerability to economic shocks by further liberalizing the economy.

After the S&P move, all eyes were on the Government of India as to what they would have to say about the same. According to media reports, the finance minister has slammed S&P, saying that the process it follows is not transparent and the Indian economy is in much better shape than perceived by the rating agency.

We believe that the S&P downgrade threat should now wake up the government prompt it to take some bold steps on the policy front. It has been long overdue for some of the reforms which are delayed every time for some reason or the other. Our economic situation has worsened with very sluggish growth, the current and fiscal account deficit moving higher, rampant inflation, depreciating rupee and the absence of good governance.

In this regard, we at DSIJ have written an open letter to the prime minister which was published in our Issue No 13 dated June 17, 2012. Investors and readers could refer to this issue for better insight. We believe S&P might be too harsh in its report but let us not ignore them and instead take that in a positive way through some constructive steps that will take our economy on the path of robust growth.