Risks rise for India as global economy totters

The Indian economy faces the added risk of heightened policy paralysis, which economists say has the potential to hurt growth as investors stay on the sidelines.
NEW DELHI: Risks for the Indian economyhave intensified in recent weeks and any drastic change in ratings by global rating agencies in coming months could pile pressure and add to the gloom that has gripped Asia’s third-largest economy.Ratings agency Standard &(S&P) says risks associated with weaker-than-expected global growth, sovereign debt concerns in Europe and potential tightening in funding conditions weigh on Asia-Pacific’s sovereign credit trends.The Indian economy faces the added risk of heightened policy paralysis, which economists say has the potential to hurt growth as investors stay on the sidelines.

“The three risks would be inflation, low or negative growth in the agricultural sector and potential policy paralysis if further issues arise which could stop the proceedings in the Parliament, as has been the case until quite recently this year,” Takahira Ogawa, S&P’s director of sovereign and international public finance ratings, told TOI when asked about the key risks facing the economy. S&P has a BBB- (stable) rating on India, which implies investment grade.

“We expect India’s growth rate for fiscal year 2011-12 to be 7.8%,” Ogawa said.

Several economists that TOI spoke to said growth could slow to 7.2 to 7.5% in the current fiscal largely due to the impact of the Reserve Bank of India’s aggressive interest rate tightening to counter stubbornly high inflation. The International Monetary Fund too has trimmed India’s growth estimates citing weak growth in the rest of the world.

According to Ogawa, the fiscal deficit – a measure of the extent to which the government has to borrow – could widen to 5.7% of gross domestic product this year if crude prices remain high. Asked when S&P will issue fresh ratings views for India, Ogawa said: “We review our sovereign ratings on a regular basis. Our analysts will make the calls on credit risk as they see them based on Standard & Poor’s published rating criteria.”

The global economic situation has worsened in recent weeks. The Federal Reserve on Wednesday said there are significant downside risks to the US economic outlook, including strains in the global financial markets. The rising economic woes on both sides of the Atlantic have wreaked havoc across global financial markets.

In India, the stock market has plunged while the rupee has posted its biggest weekly fall in more than 15 years. Industrial growth in July slowed to 3.3% while high interest rates have hit investments. Exports are expected to moderate and lower-than-expected receipts may make it difficult to bridge the fiscal deficit. Developments on the political front have added to the policy paralysis that had set in after a slew of scandals emerged last year.

“There is complete drift and no decision making. There is a sense of despair. I don’t remember a situation like this before. I don’t see any cure in the short term,” former RBI governor Bimal Jalan said. He said even if there were adverse rating actions in the months ahead it would lead to some short-term volatility in the stock market. According to him, the key issue is to restore confidence.

Analysts say the slide of the rupee is not a good sign and there is an urgent need for the government to act and reverse the situation to enable the economy to return to its robust growth path.

“What is worrying is that the rupee has collapsed. This is a real concern. This means money is not coming in. This is not good for a country which is planning to grow at 8%-9%,” HDFC chairman Deepak Parekh told TOI.

“We have to open up FDI, make it attractive for companies. Indian companies are going abroad, foreign companies are not coming in. This is a cause for great concern. We are a capital short country. The government has to find ways to get long-term foreign investment into the country. Policies have to be fixed,” he said.

But Kaushik Basu, the finance ministry’s chief economic adviser, defended the government’s handling of the price situation. “I believe it is a difficult situation that has been very well handled in India. This is clear from global comparisons. We are still amongst the most robust economies,” he said.



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