New Delhi:
Credit rating agency Standard and Poor's has warned that India may become the first among the BRIC - Brazil, Russia, India and China - countries to lose its investment grade rating, citing slowing GDP growth and political roadblocks to economic policymaking as some of the factors that could lead to such an action.
Indian markets reacted strongly, with the Bombay Stock Exchange's benchmark Sensex falling 0.33 per cent into the red to close at 16,622 points.
Here are 10 reasons why S&P in its report , "Will India Be The First BRIC Fallen Angel?", says India's rating could be at risk.
Divided leadership the biggest hurdle: 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 Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy. (Read: Full text of S&P report 'Will India be the first BRIC fallen angel?')
Sonia Gandhi holds no cabinet position: Paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position.The division of roles between a politically powerful Congress party president, who can take credit for the party's two recent national election victories, and an appointed prime minister, has weakened the framework for making economic policy.
An unelected Prime Minister with no political base: The government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own. Dr Singh was arguably more effective in his term as finance minister in the Congress minority government under Prime Minister Narasimha Rao, which liberalised the economy in the early 1990s, than he has been as prime minister since 2004. The difference is likely due to Mr Rao's political support for Dr Singh when he proposed dramatic steps to open the economy. Dr Singh appears to lack that level of support from his own party today.
Prime Minister has limited influence on cabinet: Manmohan Singh did not run for office in 2009 and, according to many political analysts, appears to have less influence within the Cabinet than previous prime ministers. In fact, the Cabinet is appointed largely by Sonia Gandhi and leaders of the allied parties, who choose their own candidates for the Cabinet posts allocated to them within the coalition. Hence, the prime minister often appears to have limited ability to influence his cabinet colleagues and proceed with the liberalization policies he favors (and constantly advocates in his public speeches).
Congress Party divided on economic policies: Many senior leaders in the party appear to oppose further economic liberalization, or are not enthusiastic about it, in our view. Many leaders oppose steps that would reduce the discretionary powers of public officials over regulated sectors of the economy out of self-interest, not ideology, fearing the loss of political power. Some leaders may think that economic reforms will cost them votes. Many have likely become complacent about India's economic growth, comforted by the fact that the economy grew so rapidly for so many years (since 2004) despite few significant new reforms.
Concern over retrospective tax: Recent announcements by the government on taxation matters, such as the retrospective implementation of taxation on the offshore transaction of assets in India, have raised concerns among foreign portfolio and direct investors. Such incidents have raised the perception of risk among both foreign and domestic investors and could reduce India's growth prospects in the coming years.
Business confidence has taken a hit: Local business confidence in India has deteriorated for various reasons, including perceptions of "policy paralysis" within the central government. A perceived slowdown in government decision-making, failure to implement announced reforms, and growing bottlenecks in key sectors (including lack of reforms to archaic land acquisition laws that hinder investment) has undermined business confidence. And infrastructure problems, combined with growing shortfalls in the production of coal and other fuels, have dampened investment prospects.
Corruption could undermine pro-market policies: Political scandals involving corruption charges have created a rising public perception of poor governance, which could increase the risk of policy reversals. Allegations of corruption in heavily regulated sectors, such as mining, telecommunications, oil and gas, and land acquisition, could gradually undermine public support for pro-market policies.
Remote possibility of growth slipping to 4-5%: Some observers in India possibly assume that the economy could sustain 6%-7% GDP growth in the coming years without active reforms or more effective economic management. However, we should not exclude the possibility of a more significant drop in trend GDP growth (perhaps to 4%-5%) if weak economic management coincides with a bad external shock or with bad luck, such as a poor monsoon.
Stagflation if government fails to act decisively: India could face the risk of stagflation if the authorities fail to coordinate fiscal and monetary policies and act decisively. Prolonged policy incoherence resulting from a poorly managed coalition government raises the risk of a tardy response, and a rating downgrade.
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