India's finance ministry on Thursday begged Fitch Ratings to take a less jaundiced view of the country's sovereign debt in a bid to slow the rupee's seemingly unstoppable plunge without taking tough political decisions to cut government spending.
“We pitched for a ratings upgrade,” the Hindustan Times quoted a finance ministry official as saying. “We told them: look at FDI inflows, look at the returns in the market. We said we are committed to capping subsidy at 2% of GDP.”
Translation: “Please, please, please, please help us save the Droopee!”
Fitch last rated India's foreign and local currency debt at BBB-/stable in 2010, according to the HT. But things have gone seriously south since then, and the slide has accelerated dramatically in 2012. Meanwhile, last month Standard & Poor's (S&P) downgraded India's credit outlook to negative “in a sign that the Indian government may be on a dangerous course toward borrowing beyond its capacity to repay,” the paper said.
The Bombay Stock Exchange's benchmark Sensex has lost 8 percent since March 16, when Finance Minister Pranab Mukherjee unveiled the new government budget. The rupee has sunk 10 percent against the dollar in the last three months, setting new all-time lows on an almost daily basis. Foreign institutional investors pulled out nearly a billion dollars in April alone. Meanwhile on Thursday a financial adviser to the prime minister, and former central bank governor, told the Indian Express that the bank's usual market interventions to mop up rupees wouldn't be enough to stem losses, and the PM needs to do something to lure back those fleeing dollars. Moreover, an unexpected increase in inflation in April has “considerably diminished” the bank's ability to buy rupees.
“We need to take measures to encourage capital flows. Foreign direct investment will be influenced by better growth prospects. We need to allay some of the concerns of FIIs to encourage investment in equity and debt,” the PM’s Economic Advisory Council chairman C Rangarajan told The Indian Express.
With the euro zone crisis on everybody's mind, several Indian papers wonder (most likely prematurely) whether India has the potential to become another Greece. So what's the prognosis?
"Given the local economic problems and global turbulence, there’s a good chance the Sensex could tumble further to 15,000 in the short term; in the worst-case scenario, it could plunge all the way to 12,000," writes FirstPost.com. "The rupee has also hit a new all-time low of 54.56 against the US dollar, and bets are increasing that it could tumble to 60 in the next 12 months." (On Thursday, the Sensex closed at 16,070.5).
India's easy options include raising the cap on foreign investment in corporate bonds from the current $20 billion, selling dollars to oil companies directly, and floating government-backed bonds to attract investment from non-resident Indians, the HT said.
But, like Greece, India needs to make some unpopular moves to cut the deficit. The difference is that India is already a country without much in the way of a social safety net, with hundreds of millions living below the poverty line. So spending cuts need to be targeted carefully and accompanied by measures to raise funds and stimulate growth (despite the resulting increase in inflation). That means making progress on reforms like the proposed value-added tax, but maybe also action on loosening the rules on FDI in retail, since the government is so desperate for dollars.
Will it happen? Stay tuned.