S&P's reasons on why India may lose investment-grade rating

Credit rating agency Standard and Poor’s has warned that India may become the first among the BRIC—Brazil, Russia, India and China—countries to lose its investment grade rating, citing slowing GDP growth and political roadblocks to economic policymaking as some of the factors that could lead to such an action.

The 'BBB-' long-term sovereign credit rating on India is currently one notch above speculative grade.

Indian markets reacted strongly, with the Bombay Stock Exchange’s benchmark Sensex falling 0.33 per cent into the red to 16,622 points.

Here are the reasons S&P has given:

1. Divided leadership at the Centre biggest hurdle for economic liberalization: Local business confidence in India has deteriorated for various reasons, including perceptions of "policy paralysis" within the Central government, S&P has said. Several reformist measures such as FDI in aviation, retail, the pension reforms Bill, the Direct Taxes Code and the Goods and Services Tax are pending at various stages due to lack of consensus among the coalition partners.

2. Slowing growth, political roadblocks put investment grade rating at risk: Senior Indian policymakers remain committed to liberalizing the economy and pursuing an increasingly market-oriented growth strategy. However, the momentum for economic reform has largely stalled in recent years as a result of political factors. The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks.

3. Setbacks in economic policy have hurt investor sentiment: Recent political scandals involving corruption charges have created a rising public perception of poor governance, which could increase the risk of policy reversals. Allegations of corruption in heavily regulated sectors, such as mining, telecommunications, oil and gas, and land acquisition, could gradually undermine public support for pro-market policies.

4. Retrospective tax changes have raised concerns among investors: Rich overseas entities, investing in Indian markets through 'Participatory Notes', are estimated to have pulled out over Rs 1 lakh crore (about USD 20 billion) in less than three months on fears of getting caught in the government's taxation net and its black money trail. As a result, the quantum of money invested through these P-Notes has hit its rock-bottom levels of just about 10 per cent of total FII (foreign institutional investment) holdings -- which used to be more than 50 per cent a few years ago.

5. Recent economic developments point to slowing growth: Standard & Poor's raised India's long-term sovereign credit rating to 'BBB-' in January 2007, making India the poorest sovereign (in terms of per capita GDP) to receive an investment-grade rating. One of the key elements contributing to the upgrade, and sustaining the current rating, was India's ability to achieve comparatively high rates of economic growth. Favorable long-term growth prospects and a high level of foreign exchange reserves support the country's sovereign rating, while large fiscal deficits, a high debt burden, and a lower-middle-income economy constrain it.