Credit ratings agency Standard and Poor?s downgrade warning to India sends a further worrying signal to the markets that the country is beginning an economic backslide. The warning from S&P comes hot on the heels of warnings by international business about the repercussions of new tax proposals which would allow authorities to make retroactive tax claims on overseas deals and bring in new anti-tax-avoidance measures.
India?s most famous businessman Ratan Tata recently termed his country a banana republic, exasperated as he is with the sclerotic mismanagement, bureaucracy and corruption in India. ?Why is it that whatever good we do is always turned into evil by someone? Will this be the fate of all honourable businesses in this country?,? he asked.
S&P has cut its outlook on India?s long-term debt to negative. The shift steps up pressure on Delhi to cut spending and take steps to attract more foreign investment at a time when the ruling coalition is struggling with a downshift in economic growth and faces political opposition to efforts to push through overhauls before elections in 2014.
S&P maintained India?s credit rating at triple-B-minus, the lowest investment-grade rating, but said there was a one-in-three chance that it could be downgraded to junk status over the next two years, ?if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.?
A downgrade could see India?s borrowing costs soar. ?A downgrade would have huge implications for the economy. India is at the lowest rung of the investment grade and a downgrade would result in the country falling to the junk category. This will result in certain allocation for India going away and a rise in the funding costs of corporates,? said Ashish Vaidya at UBS India.
Besides revising its outlook on the sovereign debt, S&P also put on its negative list three IT companies: Infosys, TCS and Wipro. Similarly three public sector entities NTPC, NHPC and Steel Authority of India have had their outlook revised to negative. Corporations and banks could find it tough to raise funds through international bond issues. The global plans of Indian companies depend on the availability of global finance. All the major acquisitions by large Indian businesses have been on the back of financing from multinational banks.
The Reserve Bank of India (RBI) recently cut a benchmark interest rate for the first time in three years in a bid to stimulate business spending. The country?s trade deficit skyrocketed to US$185bn in the fiscal year, a 56% jump over the previous year, as oil and gold prices shot up. The current account deficit is about 4% of GDP. That is pressuring the rupee, which fell 18% against the dollar in the past year.
Commerce Secretary Rahul Khullar said in an interview on Wednesday that India faces a huge challenge securing the tens of billions of dollars in foreign capital which it needs to finance its current account gap. He said that European banks which have traditionally financed Indian debt are likely to cut back lending. ?Where is the capital going to come from?,? Khullar asked.
Net foreign capital investment in India dropped to US$387 million in March from US$7.2bn in February. So far in April, there has been a net outflow of about US$27 million. India?s budget deficit ? a concern noted by S&P ? touched 5.9% of GDP in the year ending 31st March, wider than the 4.6% target.
More worrying is that businesses share in Tata?s dissatisfaction with the country. Dhiraj Nayyar and Shantanu Guha Ray argue that ?it is most unusual to have significantly higher capital outflows than inflows,? for a country at India?s development stage. More and more of India?s businesses are choosing to invest overseas rather than in India.
According to the writers for India Today, Mukesh Ambani?s Reliance Industries has already invested US$5 billion in Africa and the US, and expects to double its investment abroad in four years. Anil Ambani?s Reliance-ADAG has invested US$3 billion globally in 2011, and expects these investments to more than double by 2015.
Nayyar and Ray said that the Tata Group, which makes 65% of its revenues overseas, has invested more than US$1 billion internationally this year. Essar expects to invest US$6 billion overseas by 2015. Meanwhile Bharti Airtel spent US$8.2 billion acquiring Middle East-based telecom firm Zain?s Africa operations last year.
Between April 2010 and March 2011, overseas investment by Indian firms was a massive US$44 billion, an unprecedented 150% rise from the US$18 billion in the 12 months before. Simultaneously, FDI to India between April 2010 and March 2011 was US$27 billion, 25% lower than in the previous year. According to Deepak Parekh, Chairman of HDFC, ?Earlier, investing abroad seemed to be a risk diversification but the current impasse (in governance) makes it a necessity for companies to look elsewhere.?
Nayyar and Ray claimed that data compiled by Projects Today, shows that ?a sum of Rs.1,97,000 crore of fresh investments was committed to the Indian economy in the period between April and June 2010. A year later, between April and June 2011, that number had fallen by 70 per cent to just Rs.57,000 crore.? Corruption, mismanagement and political gridlock are largely to blame.
??When Bharti-Airtel bought Zain?s Africa operations, Mittal appointed his right-hand man in India Manoj Kohli as head of Africa operations in a clear signal of where his priorities lie. This is a remarkable turnaround and is symptomatic of the spluttering of India?s growth story,? the authors claimed.
According to Parekh, ?groups like Tata have always evinced interest in setting up a new steel plant in India but that has not materialised for one reason or another. They are making their investments abroad.?
While the Government?s commitment to spending $1 trillion on infrastructure between 2012 and 2017 should attract investment, ?a combination of inefficient ministers presiding over key ministries, uncertainty about land acquisition and environment clearances and elaborate red tape are deterring potential investors,? make it no so, said Nayyar and Ray.
According to Bibek Debroy, ?India is entering a phase of decline. We are going back to a regime of controls. There is no sanctity of contracts; permissions granted can be overturned later. There is a climate of excessive government control.?
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