India must heed S&P warning, says RBI
A warning that India’s credit rating could soon be downgraded is a much-needed shot across the bows for the government, a top central banker warned in an interview with Emerging Markets
Standard & Poors warning that it might downgrade Indias credit rating is a much-needed shot across the bows for the countrys government, according to YH Malegam, a board member of the Reserve Bank of India (RBI).
They have sounded a warning, Malegam, who also chairs Indias National Advisory Committee on Accounting Standards, told Emerging Markets.
Last week S&P downgraded the countrys outlook to negative from stable, with a one-in-three chance of a sovereign downgrade if India failed to tackle its widening fiscal and current account deficits.
In an exclusive interview with Emerging Markets yesterday S&P president Douglas Peterson said its decision had created a huge dialogue in India between officials, banks, policy makers, and industrialists. I was interested in how much impact our decision had, he said.
Malegam blamed the problems on malaise at the heart of government, with Indian politicians proving incapable of convincing the business community that they are committed to cutting red tape and boosting growth.
Policy making has slowed down, which has led to a lack of confidence across the business community, he said. Many business people think the government is either not able, or not willing, for political reasons, to improve the business environment, or improve the economy.
Many say Indias directionless government, helmed by premier Manmohan Singh, should be blamed for continually backtracking on, or watering down, pro-business reforms designed to slash bureaucracy and drag in foreign investment.
One clear example from late 2011 was Delhis decision to backtrack on a foreign direct investment (FDI) bill to grant foreign retailers like Tesco and Walmart unfettered access to Indias consumer markets.
Malegam blames the increasing federalism of Indias economy, a process led by regional voices such as Mamata Banerjee, the firebrand socialist leader of West Bengal. Banerjee was a leading dissenter against last years FDI bill, and usually decries foreign investment of any kind.
Malegam, one of the countrys clarion voices on financial market regulation, fears that rising regionalism is weakening the power of legislators in Delhi to act in Indias beset interests.
A more federal India is creating a situation in which the regional parties are becoming more powerful, he said. Those parties are in turn collectively preventing the two major parties [the Indian National Congress and the Bharatiya Janata Party] from having a stable majority in the centre. This is denuding the power of the federal structure.
Malegam said he believed Indias long-term trends remained good based on its young population and a solid retail market. In February Boston Consulting Group forecast consumer spending would hit $3.6 trillion in 2020, from $991 billion in 2010.
But Malegam said that growth depended on improved confidence among Indian business leaders. If growth can rise and inflation stabilizes, things can get better. But the trouble is that right now our business community just doesnt have enough confidence in the government.In April, the IMF said it expected Indians economy to grow by 6.9% in 2012, slightly below its January prediction of 7%, but a significant drop on the 8.5% posted in 2011. The IMF said concerns about governance and slow project approvals had weakened business sentiment which along with global uncertainty and policy tightening had adversely affected investment.