Expert Zone

Straight from the Specialists

Is the economy drifting towards a crisis?

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

Standard & Poor’s India outlook downgrade was expected. What is disturbing — the government managed to do that in less than two years. It was in March 2010 that India was upgraded to ‘stable’ — and now it’s down to ‘negative’. It was not because the government took a wrong step but because it did not take any step at all. And if this continues, the economy will be confronted with a crisis.

Ratings agencies are not taken seriously, more so by governments. Surely, ratings are not a precise science; it is more a matter of judgment. But no one likes being downgraded even when it is deserved. Last year when the U.S. was downgraded from AAA to AA-plus, U.S. officials called the assessment ‘hasty’.

In 2010, the Indian economy was growing at 8.4 percent. That growth also helped the exchequer to mop up more tax revenue and bring the fiscal deficit down to 4.7 percent, with public debt at 62.4 percent of GDP. The balance of payments was sound with current ratio at 2.9 percent which was fully covered by foreign investment and external commercial borrowings, leaving a surplus for the RBI to pile up foreign exchange reserves.

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