India’s growing stature on the global stage was underlined recently as French president François Hollande, hotly pursued by UK prime minister David Cameron, invaded the subcontinent with armies of businessmen and assorted senior officials.
Their mission was to shore up cooperation between their respective countries and India. Both already enjoy strong historical ties with India and the focus now is on ensuring they do not miss out on future opportunities to sign business agreements and win infrastructure and military contracts.
But as India enters a crucial election cycle, fears are rising about the government’s ability to stay on course with its all-important fiscal consolidation. This could yet upset the plans of overseas investors in India as confidence in the country’s short-term prospects lags behind the longer-term view.
The election is likely to stall the reform agenda, according to economists participating in Euromoney’s Country Risk Survey. Analysts fear that this might tarnish the country’s investment allure and lead to a widening in its government deficit.
Global ratings agency Moody’s recently said that India’s widening trade deficit is "credit negative" for the country and also raises its vulnerability to global shocks.
At present, Moody’s rates India Baa3 (the lowest investment grade) with a stable outlook and any downward revision from here might pull the rating into junk grade.
Seeking cross-party cooperation ahead of the new parliamentary session, India’s prime minister, Manmohan Singh, recently admitted that ‘credible action’ was needed from all to ensure that the country was not affected by what he termed the ‘formidable challenges’ posed by the global economic slowdown.
"It is now a challenge for all of us to take credible action to ensure that we are least affected by this global slowdown," Singh told reporters. "In this context, the way we conduct the financial business now before parliament will be a crucial determinant of our country’s ability to cope with the formidable challenges our country faces."
A Standard & Poor’s report said: "Given the political cycle – with the next elections to be held by May 2014 – and the current political gridlock, we expect only modest progress in fiscal and public sector reforms.
"Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership in various sectors such as banking, insurance and retail."
However, minister of finance Palaniappan Chidambaram is intent on maintaining the country’s fiscal deficit-reduction targets to 5.3% of GDP in the fiscal year to March. In a bid to reduce the country’s deficit, the government has embarked on a set of privatizations, raising $2.13 billion with the sale on February 7 of a stake in electric utilities company NTPC.
The reforms are in part an attempt to tackle the rising current-account deficit, which reached 7.1% of GDP in the previous year. In addition, a declining rupee, rising inflation – expected to average 7% to 7.5% in 2012/13, according to ICRA – and a moderation in economic growth are all factors leaving India’s credit rating in a vulnerable position.
And experts have struggled to retain confidence in the world’s ninth largest economy, after the country underwent an overall score decline of 2.2 points to 52.3 in 2012. India’s increased risk this year left the country falling five positions in the ECR rankings.
The sovereign’s global rank of 61 leaves it sitting one position below Russia in ECR’s tier three, which is the lowest position in the Bric group of large emerging economies.
India’s position in the ECR rankings equates with S&P’s triple-B minus rating, which also assigned India the lowest investment grade among the Brics, leaving it only one notch above junk status.
John Sharma, economist at National Australia Bank and one of a contributor to ECR, points to the country’s challenging fiscal position as the main threat to its risk profile in 2013.
In general, India continues to face challenges with the issue of twin deficits: current account and fiscal deficits. Moreover, the election next year might make fiscal consolidation measures tricky, Sharma says.
India’s fiscal position remains its most pressing rating constraint, according to ECR contributors. The sovereign’s government finances indicator is the weakest of the country’s economic assessment scores, with a score of four points (out of 10), shedding 0.3 points in 2012.