Monday, June 18, 2012

>Will India Be The First BRIC Fallen Angel?

Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating. Standard & Poor's Ratings Services revised its outlook on India's 'BBB-' long-term sovereign credit rating--which is one notch above speculative-grade--to negative from stable in April of this year because of lower GDP growth prospects and the risk of erosion in its external liquidity and fiscal flexibility. The negative outlook also reflects the risk that Indian authorities may be unable to react to economic shocks quickly and decisively enough to maintain its current creditworthiness.

Economic growth has slowed in India in recent months, as it has in much of the world, and the country has suffered mild erosion in its economic profile, with widening trade and current-account deficits. Its central government's fiscal deficit exceeded official projections for the year ended March 31, 2012, reaching 5.9% of GDP. In addition, inflation remains stubbornly high despite the Reserve Bank of India's tightening policies in 2011 (although the central bank recently reversed its interest rate policies to help sustain GDP growth).

India's GDP growth fell to an estimated 5.3% year-over-year in the first quarter of calendar 2012, from 6.1% in the previous quarter. The biggest contributors to growth in the last fiscal year were sectors such as real estate and financial and government services, with manufacturing, infrastructure, and agriculture showing lower growth. The Indian rupee has declined about 20% against the U.S. dollar over the past year.

In our view, setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, thus, its credit quality. How India's government reacts to potentially slower growth and greater vulnerability to economic shocks may determine, in large part, whether the country can maintain its investment-grade rating, or become the first "fallen angel" among the BRIC nations (which include Brazil, Russia, India, and China).

To read report in detail: Will India Be The First BRIC Fallen Angel?