India: Heading for the Junkpile?

As if the drought-like conditions and inflationary pressures were not enough, there is another threat looming large on the wellbeing of the Indian economy. While poor exports, rising input costs and fewer borrowing options have already been ailing India Inc., this threat could bring the crisis for Indian companies to catastrophic proportions.

We are referring to the ballooning fiscal deficit that is expected to enlarge further with the government's damage control measures in the aftermath of crop failures. The weakest monsoon in at least seven years has caused drought in 278 of India's 626 districts, damaging crops including sugar cane, rice and oilseeds.

This is expected to put pressure on the budget as shortages force the government to spend more on imports and subsidise food items to meet domestic demand and curb food-price inflation.

In his latest budget speech, the Indian Finance Minister pegged the FY10 fiscal deficit at 6.8% of GDP, the highest in 16 years. Economists expect a couple of more percentages to get added to this number taking into account the off balance sheet liabilities of the government (farm loan waivers, subsidies and the like). However, if this forecast becomes a reality, the Indian sovereign rating may have to do with a disgraceful junk rating as has been warned by the global rating agencies - S&P and Moody's.

At worst it will make overseas borrowing nearly impossible for Indian companies. Even as the basis of this rating is debatable, we wonder what saves the US, which is expected to have a deficit of 11.2% of its GDP in 2009, from a similar rating? In fact, as per the US Congressional Budget Office this will be the highest deficit since World War II and is unlikely to reduce substantially till the end of the next decade.

The logic of the US dollar's strength in being a reserve currency and thus empowering the US to leverage excessively also now stands diluted. Not just China but many developed and emerging economies have demanded for a change in the reserve currency. Thus the case for the US economy's de-rating asserts with substantial reasoning.

Are the rating agencies listening?

Comments

[adventure62:]

You are somewhat overstating the problem in India. yes, there is drought but country has stockpile of several commodities. Fiscal deficient of 6.8% i snot a big issue in the near term. Since the govt. program will create jobs and infrastructure. Money is used for right purpose and it will generate exports and efficiency. US deficient is due to military spending and bailing out the banks. These are two different situations. Just like any company, they have to borrow to scale the operation. Pay off will happen in 2-3 years. Indian govt. has not put the money with guys who do back door dealings and make hefty bonuses.

Sep 03 12:38 PM

[jynn:]

Although the author has a point ..I do not think india's situation is much worser tahn US or Europe's deficits ......And rating agencies....The same dudes who gave AAA ratings to junk CDO's ....Nahhh ...no One trusts them any more

Sep 04 06:31 AM

[captainjohann:]

Only today India lent $10 billion to IMF. Our biggest liability is the Politicians and Bureacrats who are in nexus with foreign Banks but NOT poor monsoon or inflation.

Sep 05 12:49 AM

[M.K.Bhatia:]

India with its huge population has been able absorb the recession, and the country is very much on sound footing, however if only the political willingness and the attitudes of the guys in power change....we can achieve our targets. The slow-down has "slowed-down" as such!

Sep 05 06:00 AM

[Manohar Men...:]

Country is expanding in cement (2nd largest capacity in world after China), steel, cellphones (2nd after China), now they are adding 8 lane highways in Mumbai & also getting rid of slums. Adding lot of power plants (gas, coal nuclear ). This should boost the industrial production. It just added 6.25% GDP growth vs last year vs US & Europe & Japan dead duck in water. India, Brazil, Russia & China, Egypt are the way to go. US, Europe are saturated & old retired people (lot of baby boomers retiring) economies. Roads are built & so are all airports etc.

Sep 07 04:05 PM

[Observer45:]

Your Q: "However, if this forecast becomes a reality, the Indian sovereign rating may have to do with a disgraceful junk rating as has been warned by the global rating agencies - S&P and Moody's.

At worst it will make overseas borrowing nearly impossible for Indian companies. Even as the basis of this rating is debatable, we wonder what saves the US, which is expected to have a deficit of 11.2% of its GDP in 2009, from a similar rating?"

My A: Because these raters with their triple A stamped on subprime have shown what they are capable of.

The extent of financial havoc that they have caused, I wonder why victims of this con have not filed suits against them?

Sep 09 12:08 PM

[JasonP:]

IU.com: What is your favorite country on a longer-term basis at this point?

Dent: If I had to pick one country for the next 30 to 40 years, it’d be India. It wouldn’t be China. Their demographics are going to work against them. After 2020, urbanization will come at a slower rate since younger people generally are the ones to move the fastest out of rural areas. China’s policy of one child per family, which started in the early 1970s, will begin to catch up with them between 2015-2020. Someone said China is going to get old before they get rich, and we agree with that. By contrast, India’s demographics won’t peak until about 50 years after those of China.

Sep 17 03:33 AM