India’s long term rating by Standard & Poor’s (S&P) signifies a revision of the outlook on the country’s economy. The rating puts the outlook down from stable to negative. The revision includes a culmination of the country’s weak external account and its deteriorating fiscal record in the past two years. The change in outlook signals a one-to-three chance of a downgrade in India’s sovereign rating from BBB in the next 24 months. Nearly 60 % of the countries that show a negative revision in outlook face a sovereign rating downgrade in the months ahead. The challenge is daunting for India even if there had been no S&P revision and is of an international magnitude. The country is in the grip of what is called an “India fatigue’, a comprehensive phrase for the poor investment prospects in India resulting from New Delhi’s policy crisis.
The result is that alarm bells have been sounded for India which may be headed for a vicious circle for downgrades and diminishing investment inflows. The Indian economy is already starved of investments, which has led to slower growth and further downgrades. S&P is the world’s largest credit rating agency and merits serious attention. The saving grace is that about the same time that S&P made its announcement, rival rating agency Moody’s said that the Indian economy was growing solidly but below potential. This divergence of views is a reminder of the disagreement between the two agencies on whether there had been a US downgrade or not last August. Moody’s countered S&P to say that the US was still an AAA economy. All things considered, S&P’s rating should be a wake-up call to Indian economic policy makers.