From shining India to junk

Highlights

We are familiar with junk food, junk mail etc. Credit rating agency Standard & Poor’s (S&P), which had cut India’s rating outlook to...

We are familiar with junk food, junk mail etc. Credit rating agency Standard & Poor’s (S&P), which had cut India’s rating outlook to “negative” from “stable” in April last year, has now warned that India could be downgraded to “junk” status. India’s “BBB- (minus)” long-term sovereign credit rating is currently only one degree better than the junk status.

There is more than a one-in-three chance for India’s rating being cut within two years and S & P's considers chances of a credit ratings downgrade for India higher than for Indonesia, which is now rated at "BB-plus”. If declared junk, India would become the first ‘fallen angel’ among the BRICS nations that also include Brazil, Russia, China and South Africa. India is world’s fourth largest economy after the US, China and Japan; yet, we could be bracketed with some of the Sub-Saharan countries once our ratings outlook is declared junk. It is equivalent to being regarded as bankrupt country. From Shining India to Junk it took just nine years of the UPA rule.

What happens when India is declared junk? While the cost of borrowing will increase, India’s borrowing capability will also be materially reduced, as certain investors who only invest in investment-grade bonds will shun India. Thus, the country’s ability to attract foreign investment would be considerably diminished. Whether politicians and industry leaders agree with the rating agency or not, a downgrade to so-called junk status could have very serious, very negative connotations. The longer we can’t get money (or enough of it) from the markets, the longer we have to rely on bailouts, which in turn means we have to sign up to austerity measures, as that is the price we have to pay for being bailed out. In the recent past, Greece was bailed out by the European Union, while Ireland was declared junk.

In some ways, we are to blame ourselves for where we are and what people are saying about India. The growth in India could be much higher because there is the potential for a large domestic growth story, independent of the global situation. Indian economy is suffering from self-inflicted traumas. One need not be an economist to know that if you spend more than what you earn, you will end up in debt. About Rs 2.25 lakh crore is spent on unproductive subsidies relating to food, fertilizers and fuel. An equal amount is spent on populist schemes which are a drain on the economy. India’s problem is its booming population. We will overtake China’s population by the year 2025.

China was able to control its population by the compulsory one-child norm. It is illegal to have more than one child in China. Family planning has become a dirty word in India after the compulsory family planning campaign undertaken by Sanjay Gandhi during the Emergency. Remember the “Hum do, Hamare do” slogan side by side with “Garibi Hatao” slogan of Indira Gandhi? India has to feed an additional 50 million every year. With Sonia Gandhi making the right to food legal, it is a huge burden on the government and the situation will turn worse.

Indian rupee is going the Italian Lira way. One dollar is some 1,500 Lira. That may be the reason why our Finance Minister says there is no need to panic. For the common man, the falling rupee is going to hit where it hurts most – the pocket. The high inflation has been pinching every one for more than a year. Now the weakening rupee has made crude oil, fertilizers, medicines and all that India imports in large quantities, costlier. Though these items are not for daily consumption, they impact the common man’s finances indirectly.

Besides crude oil, India imports 60-70 per cent of its edible oil requirements. Crude palm oil sets the price of other edible oils. It is imported in large quantities and any rise in its price will add to the inflationary pressure. Students who have taken loan to fund their foreign studies are also bearing the brunt. Education loans are usually in rupees, but as students pay their fees and other expenses in foreign currency, the cost of education and stay has increased.

Not only is the rupee falling, for some the pay cheque may shrink, as well. Every industry which is dependent on imports will have to face an increase in cost of production and operations, resulting in cost and salary cuts. Companies also may stop hiring more people. The Information Technology sector, which earns in dollars, stands to gain, but global recessionary conditions may offset the impact.

Petrol price is set to rise to Rs 100 a litre if the rupee slide continues and the crude prices touch Rs 125 a barrel. A worried government is talking about cut in consumption of petrol. On the one side the government allows manufacturing companies to produce more cars and facilitates to sell them with bank loans at reduced interest; and, on the other, the government is planning to curtail consumption of petrol. Instead, the government should not allow more car manufacturing units.

India’s only satisfaction is that we are not alone in fighting a free falling currency. From Turkey to South Africa to Indonesia, most emerging nations are reeling under market pressure. Only China’s yuan has appreciated to record highs because of intervention from People’s Bank of China. But India is feeling more pain than most others as our economic policy is in disarray. This is because our economy is run by politicians and not by economists. Rupee is the barometer of the strength of a country. If the rupee is weak, automatically the country becomes weak and vice versa.

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From shining India to junk

We are familiar with junk food, junk mail etc. Credit rating agency Standard & Poor’s (S&P), which had cut India’s rating outlook to...

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