What was long anticipated by economists and markets finally happened on Wednesday. Credit ratings agency Standard & Poor's cut its outlook on India to "negative" from "stable". Although it is true that this outlook may not necessarily be a precursor of a change in ratings, nevertheless it must be seen as a warning signal. Normally such assessment of countries is based on factors such as political risks, growth prospects, external liquidity, fiscal performance, debt burden and so on. When it comes to political risks, there is clearly an environment of policy inertia on reforms. Fiscal performance is worsening. This outlook is also a clear indication of how independent assessments view the unsustainable trajectory of India’s fiscal deficit situation and also the misdirected economic populism. Whatever be the interpretations, one thing is quite clear – that given the nature and the pace of economic reforms the downgrade in sovereign rating suggests that the government is less capable to meet its debt obligations in case there is no urgent policy correction. It may also result in higher cost to government borrowings. Top ratings agencies have already assigned the lowest investment grade ratings to India's long-term debt. If this outlook period does not witness the necessary changes, the eventuality of any cut in ratings will put India's long-term debt in "junk" category. What this situation also brings to the fore is the adverse investment climate, over-regulation and policies that hinder economic viability of states like Jammu & Kashmir. Let us be clear that the cumulative effect of the long-held economic and political policies that inhibit states like J&K to create a self-reliant economic system results in the current precarious fiscal situation in the country. Policies that may accelerate economic reforms, improve investment climate and growth may help in averting a downgrade of rating, but what would be wiser is to help states like J&K lower their reliance on central grants and have economic growth that is beyond public expenditure.

Lastupdate on : Fri, 27 Apr 2012 21:30:00 Makkah time
Lastupdate on : Fri, 27 Apr 2012 18:30:00 GMT
Lastupdate on : Sat, 28 Apr 2012 00:00:00 IST