Moody Fitch downgrade. The WHY and the WHAT does it mean….


The imminent threat of a downgrade by the S&P takes shape in the form of Moody and Fitch when today they have officially downgraded India from the stable state to the negative state. India is the first country in the BRIC to undergo a downgrade and that surely is something to worry about. The BRIC was being sported as the resilient economy in the overwhelming slowdown of the global economy. The BRIC was being sported the answer for the current and the future questions about the economic crisis. However the recent move by Moody and Fitch brings in a rain check on the optimism and India has another point to ponder about now.

Going on the reasons as to why the downgrade

happened, the following were quoted by the rating

agency

 

  • Corruption- There is not much of a surprise here. Corruption seems to be the answer to many questions here and the policies as well as the favours done here compromise a lot on the transparency and accountability for the permissions and the setting up of a business here. The history dates back as long as the license raj and why corruption was so important to set the ball rolling. A famous allusion I can make here not pointing too much to the credibility and the source of the statement- In other countries you are sure that it is going to work if you pay the money but here even that is not sure. Well let us not delve too much into who and why the statement was made. All I know was that the statement was made and there sure is a grain of truth to it.
  • Laxity of the government to make structural reforms and provide subsidies. The government sure does say that the rating agency has not considered the recent subsidies offered in the fertilizer, new manufacturing policy, telecom policy, etc. But the downgrade sure has happened and the blame is squarely on the delay and the inhibition to offer tax cuts and the subsidy reforms and more importantly the delay in the reforms. Perhaps something we could relate to here is the reluctance of RBI to change the CRR, repo rates. I am sure RBI has its own reasons but this is something which is being pointed out constantly.
  • Moody says that India has an awkward combination of inflation and a slow growth. This is not entirely false. We have seen the constant dip in the manufacturing profits, the exports and also the IIP which has figured its worst in the recent times. Added to this, inflation has been a major challenge from the 2008 crisis and it is equally challenging even now.
  • The agency expressed doubts about the government’s ability to meet the fiscal deficit target of 5.1% of gross domestic product set for 2012-13. This again is a true concern cos of the constant spending which is supposed to happen to maintain the external losses and to provide and up and running economy, the brunt would naturally fall on the deficit owing to the increased spending which becomes a due necessity.

What does it mean for India? And how does it affect

the growth?

  • It means India will not be considered a credible investment zone with the rating downed from stable to negative. The thought of a strong emerging economy is now in question. There is a possibility that an external investor would rather prefer to go in for any other BRIC country which offers a stable environment. It is like reducing the brand image for investment in the country.
  • Lesser investment would again hurt the economy as we go into a lesser spending mode and the whole spiral factor that it would mean more saving than spending, no money to circulate in the market. It may reduce the inflation a little but definitely offers a huge compromise on the growth.
  • On an international scale, it becomes harder to forge relations with the other countries since the economy market is not strong enough to offer sufficient and a promising business. And a weak private sector is certainly a back foot on forging relations with an external nation. This would again mean the reduction in the FDI inflow for the country. The focus should probably be on the domestic front now or how to answer the challenge put forth by the rating agency.

Well it sure seems that there are a lot of questions on the table now and the most alarming one would be

“This just reinforces the negative — and this is last thing you want to do,”… Weisberg

The question now is how the government would plan to answer to the downgrade. The article sure presents the gloomy side of the economy and the thought that India Shining would still remain a bigger brighter question to ask. But it is said that in the most challenging times comes the most innovative answers. I sure would hope to see some innovation in this front. I am both curious and hopeful that something might turn up….

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