The week gone by witnessed a historical event. The downgrading of US debt rating by S&P from triple A for the first time in 70 years led to a knee jerk reaction by the global markets. The Sensex was no exception taking a beating of 2.2%. All this raised a very important question? What is the magnitude of impact of the US debt downgrade? Will it drag India along?.
Well, as per the rating agency Standard and Poor (S&P), the situation in US will not weigh heavy on India's sovereign rating. But that is just one aspect. We have other issues to take care of.
To begin with, inflation is touching double digits. To rein in inflation, any kind of monetary tightening may have an adverse impact on credit offtake and investment and growth in the economy. The next demon to take care of is the rising fiscal deficit. The various subsidies on fuel and food overhang on the government finances. While the government intends to deal with the situation through divestment in public sector firms, the environment for the same does not seem to be very positive. Any kind of slip up or delay there coupled with rising food and fuel prices could make us bear a heavy cost in the form of a downgrade.
But amongst all these concerns, there is optimism as well. The US debt downgrade has led to a cool down in the commodity prices that will help India control inflation. Again, the recent turn of events will make India look more attractive with respect to global capital inflows. The infrastructural growth induced by such inflows has the potential to catapult India into the league of economic giants.
To conclude, the recent downgrade is just an acceptance of the crisis that engulfed the economic major long time back. While such events do have short term adverse impact, they are also the latest opportunities for India to realize its ambitious growth plans in the long run.