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Time to act, not panic PDF Print E-mail
Thursday, 26 April 2012 00:28
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FM's right, but if he doesn't act, downgrade certain

Finance minister Pranab Mukherjee is obviously right when he says there is no reason to panic about S&P lowering its outlook on India to negative from stable while keeping the rating at BBB- (S&P says there’s a 1-in-3 chance of a downgrade if things don’t get better). The government has little external debt, forex flows don’t really depend upon country ratings and, as was pointed out by most analysts, there is little new economic news that S&P is reacting to. Indeed, as our columnist Madan Sabnavis points out (Indian fundamentals stable), economic growth appears to be picking up, the current account deficit is largely the way it is due to excessive imports of gold and, despite the high fiscal deficit, RBI has ensured adequate liquidity and there are few signs of local investors being crowded out by higher government-spend. And, as RBI Governor Duvvuri Subbarao pointed out last week, not only is India’s import cover much higher than it was in 1991 (this was in response to the refrain that 2012 was the new 1991), forex reserves are around 95% of external debt as compared to just 7% in 1990-91. But crises occur when concerns that can each be dismissed individually come together, the perfect storm as it were. India’s large forex reserves are a cushion, but with a 4% current account deficit putting pressure on the rupee, any attempt by RBI to protect the rupee depletes reserves ($20bn got spent doing this a few months ago). Gold import duties will curb growth and help reduce the current account deficit but, thanks to the GAAR issue, FII inflows fell from $9.2bn in February to $1.7bn in March and a mere $122mn in April. While FDI flows rose by $10bn in FY12 (this matched, roughly, the decline in FII flows), this could get jeopardised by the retrospective tax changes and the near-daily battle of words with Vodafone—the latest was the finance secretary saying Vodafone knew about the tax demand and even paid Hutch less due to this, implying it wasn’t quite the innocent it was making itself out to be (naturally, Vodafone has reacted sharply to this). RBI has managed liquidity and ensured private investors weren’t crowded out, but this was due to lower private sector investments. The amount of restructured debts rose 500% (http://goo.gl/AUpKJ) while the amount of loans approved at the corporate debt restructuring cell rose 35% to R1.5 trillion by March 2012 and Crisil projects this to rise to R2 trillion by next March—while corporate default rates are up to a decadal high, Crisil points out this time around, it is not SMEs that are defaulting, it is large corporates. Not panicking is sage advise, but only if followed with concrete action. The fact that, in the middle of all the bad tidings, the telecom regulator has given recommendations that seek to hike spectrum costs 10 times and to disrupt even the more profitable telcos kind of tells its own story. Forget reforms, the big fear now is that, in the run-up to the 2014 elections, the government could legislate the Right to Food which will add 1.5 percentage points to India’s ballooning fiscal deficit—a full-blown crisis with no one at the wheel is what S&P fears. So should we.

 

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