13/06/2020 - Indian Economy

KEY POINTS

·         The decision of Standard & Poor’s (S&P) to affirm India’s sovereign credit rating with a stable outlook will help contain the uncertainty in financial markets to some extent, as a downgrade from the lowest investment grade would have added to the volatility.

·         Although India has managed to retain its investment-grade rating, the economy would require careful policy interventions to be able to strongly recover from the Covid-19 downturn and strengthen the medium-term growth outlook.

·         According to S&P, India ratings reflect above-average growth, a sound external position, and evolving monetary settings. The rating agency expects the Indian economy to contract by 5 per cent in the current fiscal year and recover sharply by 8.5 per cent in the next year.

·         India’s strong external position with sufficient foreign exchange reserves, which are inching towards the $500 billion mark, are a big positive and would help enhance investor confidence.

·         The central bank would, however, need to make sure that the improvement in the current account position because of the fall in crude oil prices does not result in a further overvaluation of the rupee, which will affect India’s export prospects as global trade recovers in the coming quarters.

·         But there are a number of weaknesses that would affect India’s growth and rating prospects in the near to medium term. For instance, India’s weak fiscal position will not allow the government to provide adequate support to the economy.

·         S&P expects the general government debt to rise by over 10 percentage points to over 80 per cent of gross domestic product (GDP) in the current year. The weak revenue outlook would push the general government deficit to 11 per cent of GDP this year.

·         The other problem which could affect economic recovery is the weakness of the financial sector. The government would need to recapitalise public-sector banks.

·         A weak recovery could put further pressure on government finances and the financial sector in general. Therefore, it would be critical for the government to quickly take the structural reforms forward.

·         In this context, there is a fear that the idea of “self-reliance” could lead to protectionism and import substitution, which would affect India’s longer-term growth prospects. This must be avoided. Further, there is a need for better coordination between the Centre and the states in implementing reforms in the area of land and labour.

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