Rating agency Moody’s downgrading of India’s sovereign rating did not come as a surprise to anyone. Moody’s has been more optimistic than the fellow rating agency Standard & Poor’s on India’s economic prospects and this has reflected in their rating actions in the past. Friday’s downgrading is a reflection of the agency’s pessimism on India’s growth prospects and the country’s ability to bring down the fiscal deficit.
The worries about the deficit are not misplaced. India is expected to fall Rs 2 lakh crore short of its revenue targets for this financial year, while the government will end up spending more to tackle the economic slowdown caused by the lack of consumer demand. It is calear that the government will overshoot the fiscal deficit target of 3.3% of the GDP by a wide margin. Despite a Rs 1.76 lakh crore dividend payout from the Rseerve Bank of India, the government will need to go on a PSU disinvestment overdrive to keep the deficit figure at a respectable level. The rating downgrade couldn’t have come at a worse time. The growth numbers for the July-September quarter is expected later this month and it will be a surprise if the number is above the previous quarter’s 5%.
More disappointing than the downgrade is the government reaction to the rating action. The finance ministry communication says India is still among the fastest growing economies in the world and a recovery from the slowdown is just round the corner. Being in a state of denial will not help sove the problems confronting the economy, as the entire global economy is going through a crisis. Every sector of the economy seems to be in a state of crisis. The first step towards solving a problem is the recognition of the problem itself.