Division of roles between Sonia Gandhi, PM has weakened the economy: S&P
Global agency Standard and Poor’s on Monday threatened to downgrade India’s credit rating to ‘speculative grade’ saying the roadblocks for reforms are on account of division of roles between Sonia Gandhi and ‘unelected’ Manmohan Singh.
The crux of the current political problem for economic liberalisation is the nature of leadership within the central government and not ‘obstreperous’ allies or an ‘unhelpful’ opposition, it said.
“Slowing GDP growth and political roadblocks to economic policy making could put India at risk of losing its investment grade rating”, the S&P said in its report — Will India Be The First BRIC Fallen Angel?
On its part, the government said that it is taking steps to contain fiscal deficit and the Current Account Deficit (CAD).
Standard and Poor’s, which had lowered India’s rating outlook to ‘negative’ from ‘stable’ in April, said the Congress party is divided on economic policies and there is substantial opposition within the party to any serious liberalisation of the economy.
“Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected Prime Minister Manmohan Singh, who lacks a political base of his own”, it said.
The S&P said the division of roles between “a political powerful” Congress President and an “appointed” Prime Minister “has weakened the framework for making policy, in our view.”
The S&P report led to substantial erosion of gains in the stock market in early trade and the BSE Sensex finally closed 51 points down. It also left a negative impact on rupee against dollar.
Standard and Poor’s further said that the Prime Minister “often appears to have limited ability to influence his cabinet colleagues and proceed with liberalisation policy he favours…It would be ironic if a government under the economist who spurred much of the liberalisation of India’s economy and helped unleash such gains were to preside over their potential erosion.”
Setbacks or reversals in India’s path toward a more liberal economy, S&P’s credit analyst Joydeep Mukerji said, “could hurt its long-term growth prospects and, therefore, its credit quality.”
S&P had upgraded India to investment grade BBB rating in January 2007, after four years of above nine per cent 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 economic growth fell to a nine-year low of 5.% for the three months ending March 2012, while the overall growth for FY’12 stood at 6.5%, lower than the 6.7% clocked during the peak of the credit crisis in the Western world.
“Failure to advance with more liberalisation 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 liberalisation 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 the current times through.