Ratings agency Standard and Poor's has
cut India's credit outlook to negative
over multiple structural concerns plaguing India's economy.
The negative outlook implies "at least a one-in-three likelihood"
that India will receive a credit downgrade as conditions continue
to degenerate. S&P currently rates India at its lowest
investment grade rating of BBB-.
The breadth of problems for the Indian economy (
) is certainly worrisome for investors. A growing current account
deficit, a slowing economy, an intractable fiscal deficit, a
perpetually weaker rupee, outflows of foreign direct investment,
and rising inflation all contribute to concerns over the
long-term performance of the Indian economy (
Unfortunately, due to the current macroeconomic and political
climate, none of these problems have an easy fix.
India remains a net-importer of fuel because of the country's
lack of oil and gas resources. As the price of oil in dollar
terms remains elevated and the rupee continues to depreciate,
India's current accounts deficit is unlikely to ameliorate
without a precipitous drop in the price of oil.
Furthermore, India's weakening economy is not helped by the
antipathy towards foreign businesses propagated by the Indian
government. Woefully inefficient sectors like retail and
agriculture would see a massive productivity boost from foreign
protectionist forces within the Indian
prevent such solutions from materializing. Airlines and banking
would also benefit from capital injections from abroad.
While the Indian government has not yet embarked upon
nationalizations à la Argentina, its treatment of
entrenched firms in the telecom space will not encourage further
investment from foreign firms.
A proposed tax that would
retroactively penalize Vodafone
and a massive
increase in spectrum licensing fees
is evidence that the powers in New Delhi are much more interested
in extracting from corporations than fostering an environment
that would allow them to thrive.
Until this course is reversed, it's unlikely that the outflow
of foreign direct investment will change.
And here lies the most concerning problem for India going
forward: the country is in the midst of a political sea change.
The two traditional national parties, the Bharatiya Janata Party
(BJP) and the Indian National Congress (Congress), are seeing
their power wane, whereas regionally and caste-based parties like
the Trinamool Congress
are becoming more popular
These political entities seem to be less concerned about the
health of the national economy and more preoccupied with regional
populism. For example, West Bengal's leader has adopted a
particular focus on protectionism, both internal and external, as
well as an emphasis on public-sector jobs at the expense of
This trend does not bode well for India. Parliamentary
gridlock will augment, not subside, as disparate interests will
be unable to find middle ground. While there is much to dislike
about India's two main parties -- the BJP can be uncomfortably
jingoistic in its Hindu nationalist rhetoric and Congress has had
their fair share of corruption and nepotism -- both parties'
commitment to economic liberalism and to Congress' Manmohan
Singh's capitalist reforms from his stint as Finance Minister in
the early 1990's allowed India's two major parties to work
together for the past two decades, at least on economic
By passing effective legislation, the Indian economy finally
shed the notorious distinction of always achieving the
underwhelming, so-called "Hindu growth rate" of 3%. If Congress
and BJP continue to lose political clout and more populist
regional parties start to dictate the agenda in New Delhi,
India's economy will unequivocally suffer as a result.
Various sectors will face different challenges as the result
of a changing political dynamic in India. Consulting firms like
) and Wipro (
generate much of their income from US and Europe
are unlikely to be affected by a weakened rupee. A weak home
currency can actually inflate their revenues in rupee terms. As
well, governments in places like Karnataka (Bangalore) and Andhra
Pradesh (Hyderabad) are unlikely to enact reforms that would kill
their golden geese.
As for the automotive sector's darling Tata Motors (
), considering that
two-thirds of the company's revenue
comes from Jaguar Land Rover's mostly international operations,
the company would not be too affected by a weakened rupee. As
well, while the company has been forced to rethink a few of its
plants in India because of local government interference, more
business-friendly states like Gujarat and Maharashtra are
unlikely to impede
the company's operations in those locales
However, it would appear as if the Indian banking sector could
struggle as a result of the current Indian political quagmire.
The ADRs for banks like ICICI (
) and HDFC (
) whose assets are mostly rupee-denominated would be affected by
inflation and a perpetually weakening currency when evaluated in
As well, policy discord and a concomitant ratings downgrade
would certainly affect the profitability of this sector,
considering they generate the majority of their revenue from
Disclosure: Author's immediate family are long TTM and