India’s slide leads to an international down-grade

It had to happen. India’s slide in the past two or three years from a self-perceived emerging economic super-power to its current crisis of appalling government performance, sliding economic statistics, and almost daily political crises has today led to a damning international verdict with ratings agency Standard & Poor’s deciding to cut India’s outlook to negative from stable. S&P cites India’s large fiscal deficit and expectations of only modest progress on reforms, given political constraints and falls in both the stock market and the value of the rupee

This reflects the basic problem of a lack of firm government and the international uncertainty that creates. Some economists however thought S&P’s action was premature, and Moody’s rating agency said it expected growth to be sustained, supported by “strong savings and investment rates”.

The S&P move puts at risk India’s long-term rating of BBB-, which is the lowest investment grade. It could hit the inflow of funds and thus the balance of payments if economic growth slips below current forecasts of around 7%. “The negative outlook signals at least a one-in-three likelihood of the downgrade of India’s sovereign ratings within the next 24 months. A downgrade is likely if the country’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,” S&P credit analyst Takahira Ogawa said in a statement.

Yet Pranab Mukherjee, the finance minister (pictured above), responded blandly saying, “There is no need for being panicky.” The situation “may be difficult, but we will be surely be able to overcome”. That chimes with the reaction of Manmohan Singh, the prime minister (reported here last week), when he dismissed public warnings on the economy and reforms from some of his closest friends and economic advisers. He said they were “difficulties” that would be “overcome”.

Mukherjee’s reaction shows he and his colleagues seem to assume that India is cushioned from outside pressures as it was before the 1991 economic reforms, which of course is wrong now it relies on inward direct and institutional investment. Mukherjee is basing his optimism partly on hope that three bills on pension funds, insurance, and banking will soon be passed by parliament, but it will be a miracle if that happens.

The government has had a series of major and minor crises that neither the Congress Party, led by its president Sonia Gandhi, who heads the unruly government coalition, nor the government itself headed by the prime minister, seems to know how to stem let alone solve.

Foreign investors looking into India see a government that lacks coherence and leadership in planning and implementing policies and reforms that range from foreign direct investment to land acquisition. Yes at the same time, the government has the gall to snub foreign investors by threatening multi-million/billion dollar retrospective tax demands on major companies such as Vodafone.

When this government was first elected, it was said to have a “dream team” of economic managers – the prime minister, finance minister Palaniappan Chidambaram, and Montek Singh Ahluwalia running the planning commission. None of these men however had either the contacts or string-pulling know-how to make things happen, and they were quickly constrained by the populist reform-wariness of Sonia Gandhi and Rahul, her son and heir apparent, plus their coalition partners.

Now the prime minister, at 79, seems tired of the “difficulties”, Chidambaram is running the home ministry, and Ahluwalia’s impact slips the weaker the prime minister becomes. Chidambaram’s successor at finance, Pranab Mukherjee, a veteran and agile political problem-solver, seems to be losing his touch – never a reformer, he is leading the tax attack on foreign investors and is creating levels of uncertainty and insecurity that no modern economy could survive.

Alongside that, Sonia Gandhi has long-term health problems (though it is not known how serious they are), and Rahul has lost his credibility with disastrous Uttar Pradesh state assembly election results last month and with little else to show for eight years in politics.

Numerous other ministers and party leaders are being felled or weakened by a series of catastrophes. Yesterday came inexplicable reports that four ministers had offered to resign their posts to help rebuild the Congress Party for the next general election due in 2014. Those involved denied they had done so, but the widely reported news surely shows skewed priorities. Isn’t it more important to run ministries well and boost the government’s performance before the election than to move to the party’s offices – or have the ministers decided it is best to jump from a foundering ship and hope their future looks brighter in a party lifeboat?

It is not only the economy and policy making that is in trouble. India’s once proud army is being weakened, not only by corruption scandals that block big defence orders, but by a series of internal rows that range from the army chief going to court over when he should retire and a court case (dismissed this week) against the choice of the next army chief.

Today the government faces more trouble with headlines on a revealing footnote to history. This is the 25th anniversary of the Bofors gun deal scandal that rocked the then Congress government run by Sonia Gandhi’s late husband, Rajiv, and still reverberates through Indian politics and defence ministry decision-making.

Sten Lindstrom, a former Swedish police chief who was heading inquiries into Bofors in 1987, today has identified himself as the source for the Indian end of the story. In a current interview with the journalist who was then the recipient of his leak, he said there was “no evidence” that Rajiv Gandhi received a bribe, but that there was “a political payment”. The damning revelation is that Rajiv Gandhi “watched the massive cover-up in India and Sweden and did nothing,” says Lindstrom.

And so it is today. The guilty have escaped numerous corruption scandals, most recently on the Commonwealth Games, defence deals, and mining licences. Non-performing political leaders and ministers are not replaced. Loyalty to those at the top is what matters.

Now S&P has blown the whistle – but will it have any effect?

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  India is still stuck with mind boggling bureaucracy and still mired in a culture of open corruption, both national and regional. Add all these problems to India’s pro protectionist trade mentality of blocking foreign competition from entering the country, and India still as many fences to jump.