S&P warns: India could be first BRICS ‘angel’ to fall

Its latest assessment,it said,was based on forecasts for economic growth and the possible effects on business confidence and the government’s commitment to economic reform.

A rating downgrade by S&P will push India down to junk status which could affect foreign capital flows to India. The report,dated June 8,“Will India Be The First BRIC Fallen Angel?” said that the Centre’s reaction to potentially slower growth and greater vulnerability to economic shocks could largely determine whether the country can maintain an investment-grade rating.

The ‘BBB-’ long-term sovereign credit rating on India is currently one notch above speculative grade. The warning spooked investors with the Sensex erasing early gains and closing 51 points lower at 16,668.01. The index had surged nearly 200 points in the opening session. The rupee also closed down at 55.74/75 per dollar as against 55.42/43 on Friday.

“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and,therefore,its credit quality,” said S&P analyst Joydeep Mukerji. S&P revised the rating outlook to negative from stable in April 2012 because of India’s lower GDP growth prospects and the risk that its external liquidity and fiscal flexibility may erode. It had then cautioned that the downgrade can happen anytime within 24 months,depending upon the progress in fiscal consolidation and growth among other factors.

“The combination of a weakening political context for further reform,along with economic deceleration,raises the risk that the government may take modest steps backward,” Mukherji said.

Addressing top Income Tax officials,Finance Minister Pranab Mukherjee today: “We are taking all steps to ensure that we come back to the path of the targeted GDP growth. Of course,it will take some time but from this year we expect to make a turnaround.”