The downward revision in Indias rating outlook from stable to negative by Standard & Poors is a grim reminder to policymakers and fiscal managers: perform or perish. If a downgrade happens in the near future,it could impact capital flows and push up borrowing costs of Indian firms abroad. After a dismal 2011,portfolio flows had picked up in the January-March quarter of 2012. If inflows fall again,it could impact Indias external sector as the country was financing its current account deficit with capital flows. While this (downgrade) is incrementally negative for the rupee and capital flows (portfolio and direct),we believe the rating remaining at investment grade contains the damage. Had a rating downgrade (to non-investment grade or junk) happened,it would be far more negative,since it would escalate funding costs for Indian firms abroad,and preclude some FIIs to access local debt and equity markets, said Gautam Triveri,MD,Religare Capital Markets. Many foreign funds invest in a country depending on the rating. If its rating is junk,why should they put money? The chain reaction will continue with a negative impact on the rupee and its impact on inflation and costly imports. Even the change in outlook might turn costly for Indian borrowers. Most of the issues have already been well known and factored by the stock market and currency markets. But this definitely does not help the sentiments. Foreign currency loan market has been very tight (especially from Europe) and this could lead to a rise in spread from Indian borrowers, said Abheek Barua,chief economist,HDFC Bank. A school of thought feels that the S&P move will force the government to perform. .it should force the government to think about fiscal situation. It has no choice but to bring reforms to improve fiscal deficit, said Vijay Kedia,director,Kedia Securities. AAA-rated economies state as bad as ours S&P talked of Indias high deficits,rising subsidies,high debt-GDP ratio and low tax-GDP ratio while cutting Indias outlook to negative. However,in relative terms,the US and many other European economies which have AAA ratings are far worse than India on these parameters. Whats the basis of this negative rating on India? asks a leading market expert who preferred anonymity. ENS Reforms on HoldFDI Further liberalisation of financial sector needed by hiking FDI cap in insurance and opening pensions to foreign players. Government also needs to move ahead on permitting FDI in multi-brand retail and reviving plans for more foreign investment in defence,civil aviation. Also needs to extend automatic approval to more sectors. Tax reforms Long pending direct and indirect tax reforms Direct Taxes Code and Goods and Services Tax need to be fast tracked by building consensus to rev up economic growth. Government also needs to avoid retrospective amendments that bring in tax uncertainty. Subsidies There is an urgent need to review and reduce the subsidy burden,especially on fuel and fertilisers. Government needs to bite the bullet on diesel price deregulation and decontrolling urea prices in order to keep fiscal deficit in check. Also needs a faster transition to direct transfer of subsidies for better targeting and cutting leakages. Financial Sector Long-stuck financial sector reforms by passage of PFRDA,Insurance and Banking amendment Bills need to be taken up on a priority basis to give a positive signal to investors. Other legislations like Companies Bill,2011,also have to be fast tracked. Infrastructure It is one of the biggest impediments to a higher growth trajectory. The sector requires as much as $1 trillion in the 12th Five year plan,especially in laggard sectors for power,coal,roads and ports. Railways needs a complete re-haul while ensuring energy security is also necessary.
