Policy reforms more crucial than political party for Indian economy

Direction and pace of policy reforms in India, more than which political party takes control, can affect the ratings on the sovereign, says ratings agency S&P

Direction and pace of policy reforms in India, more than which political party takes control after the general election can affect the ratings on the sovereign, says Standard & Poor's (S&P) Ratings Services in two reports published Tuesday.

"We believe that the current political landscape in India suggests that no single party could win an outright majority," said S&P's sovereign credit analyst Kim Eng Tan. "An important factor is how fragmented the government will be. The more parties involved in the next coalition government, the more likely policies will be incoherent and less supportive of credit attributes."

According to the reports, titled "India's Election Is Pivotal for Its Sovereign Creditworthiness" and "The New Government's Reform Policies Will Be Critical To The Credit Profile Of Indian Corporates And Banks," the outcome of India's general election can provide an insight into the political stability, ability, and willingness of the new government to implement reforms for boosting economic growth.

S&P says the elections and subsequent policy actions could decide if the sovereign rating remains investment grade (at present unsolicited ratings: BBB-/Negative/A-3). If we revise our sovereign outlook to stable, those negative outlooks on banks and corporate entities, which reflect the sovereign outlook, could also be revised to stable. Ratings on government-related entities (GREs), companies rated above the sovereign, and banks that are capped at the sovereign rating level or benefitting from uplift due to government support will likely be downgraded, if we lower the sovereign rating, it added.

"We believe a decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments," said S&P's corporate credit analyst Abhishek Dangra. "This can lay the foundation for India's return to a stronger and healthier growth phase in the medium term. Conversely, a fragile government could further delay critical reforms as decision-making gets hampered, curbing revival in the investment cycle and derailing growth."

India's 16th general elections, where more than 800 million people are eligible to vote, are underway. To claim the right to form a new government, a single political party or a coalition of political parties needs to win 272 out of 543 seats.

"In our view, the infrastructure, power, metals and mining, and petroleum sectors are more exposed to risks from development in government policies affecting corporate performance and banks' asset quality and capitalization needs," Dangra said.

The new government's policy directions will set the medium-term growth expectations and long-term structural factors for the economy. In our opinion, structural reforms are essential for India to return to healthier economic growth of above 6% on a sustainable basis and stimulate investments, the ratings agency added.


Market on a Rally Mode

Positive performance of our stock-picks continues


RBI released its first review of...
Premium Content
Monthly Digital Access


Already A Subscriber?
Yearly Digital+Print Access


Moneylife Magazine Subscriber or MSSN member?

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation
El Nino effect may cause trouble for Indian Monsoon

A moderate El Nino in 2002 resulted in one of the worst droughts in India, in the past 100 years!

The Chief Monsoon forecaster, Shivanand Pai at the Indian Meteorological Department (IMD), Pune, has cautioned, according to the press, that a weak El Nino weather pattern can trigger a drought in India around July. He is reported to have stated that "there are approximately equal chances for neutral or weak El Nino conditions during the latter part of summer".


We all know that El Nino refers to a warming of water in the Pacific Ocean every three to five years that lasts for about 18 months.


India experienced drought conditions in 1997 and 2009 when El Nino weather pattern was observed. Yet, a moderate El Nino in 2002 resulted in one of the worst droughts in India, in the past 100 years!


In a recent policy announcement, the Reserve Bank of India (RBI) has stated that El Nino can cut the gross domestic product (GDP) to 5% and spike inflation to over 8.5%! It is said that a weak South West Monsoon supplemented by El Nino effect can disrupt the rainfall, which can impact agricultural growth, something with direct consequences, which we need to guard against.


Shivanand Pai's caution is supported by the Australian Meteorological Bureau who have stated that there are 70% chance for El Nino to occur, while the US Climate Prediction Centre feels that it has 50% chances. Either way, if El Nino occurs, Indian agriculture output can be in trouble.


Recently, it may be recalled we had unseasonal rains and hailstorms during February-March, which damaged our standing crops, particularly in Maharashtra that resulted in financial assistance to the affected farmers. However, one redeeming feature of this unseasonal rain has resulted in better water storage level in 85 major reservoirs. But this should not unduly influence our approach to the problem if El Nino occurs, the intensity of which we still do not know, and IMD is continuously watching the situation to be able to give a reasonably accurate indication soon.


In the meantime, our foodgrain stock situation is satisfactory in as much as stocks are higher than the strategic buffer and reserve norm. For instance, government has projected wheat production at 95.6 million tonnes but actual size is expected to be lower due to the unseasonal rains and hailstorms mentioned above, affecting the crop. The Indian government intends to procure 31 million tonnes of wheat, against the last years' purchase of 25 mt, but for various reasons, this process has been delayed by more than three-four weeks. The central pool as on 1st March is reported to be over 20.83 mt, higher than the buffer, as stated above.


Sugar production is also expected to be higher than 23 million tonnes, and our exports of various foodgrains are moving out without a hitch. The political turmoil in Ukraine has also resulted in wheat prices being firm.


Hopefully, the IMD is expected to announce their projections of monsoon in the next few days, and, they will be continuously monitoring the situation, by keeping in constant touch with others like Australian Meteorological Bureau and US Climate Prediction Centre who are all watching the El Nino movement.


In the meantime, a new government is expected to be formed soon after the election results are announced. The new government would need some more time before portfolios can be allotted and government work can commence in right earnest. The Food Corporation of India, holding the primary responsibility of stocking and distribution of foodgrains need to take additional care for preventing loss due to poor storage conditions, weather conditions, pilferage and rodent attacks.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)