Sep 3, 2009|
India can be 'junk'. What about US?
As if the drought-like conditions and inflationary pressures were not enough, there is another threat looming large on the well being of Indian economy. While poor exports, rising input costs and fewer borrowing options have already been ailing India Inc., this threat could bring the crisis for Indian companies to catastrophic proportions.
We are referring to the ballooning fiscal deficit that is expected to enlarge further with the government's damage control measures in the aftermath of crop failures. The weakest monsoon in at least seven years has caused drought in 278 of India's 626 districts, damaging crops including sugar cane, rice and oilseeds.
This is expected to put pressure on the budget as shortages force the government to spend more on imports and subsidise food items to meet domestic demand and curb food-price inflation.
In his latest budget speech, the Indian Finance Minister pegged the FY10 fiscal deficit at 6.8% of GDP, the highest in 16 years. Economists expect a couple of more percentages to get added to this number taking into account the off balance sheet liabilities of the government (farm loan waivers, subsidies and the like). However, if this forecast becomes a reality, the Indian sovereign rating may have to do with a disgraceful junk rating as has been warned by the global rating agencies - S&P and Moody's.
At worst it will make overseas borrowing nearly impossible for Indian companies. Even as the basis of this rating is debatable, we wonder what saves the US, which is expected to have a deficit of 11.2% of its GDP in 2009, from a similar rating? In fact, as per the US Congressional Budget Office (CBO) this will be the highest deficit since World War II and is unlikely to reduce substantially till the end of the next decade.
The logic of the US dollar's strength in being a reserve currency and thus empowering the US to leverage excessively also now stands diluted. Not just China but many developed and emerging economies have demanded for a change in the reserve currency. Thus the case for the US economy's de-rating asserts with substantial reasoning.
Are the rating agencies listening?
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