A new analysis from Reuters exposes a brutal reality, “India’s devastating COVID-19 crisis is making investors question more than ever whether after years of debt accumulation and patchy progress on reforms, a country touted as a future economic superpower still deserves its ‘investment grade’ status.”
Reuters is not the only voice questioning India’s sovereign rating. This past week, the United Nations said the growth outlook for the Indian economy is “highly fragile,” and according to Statista, the impact of the recent lockdown in India has “slashed GDP growth forecasts for financial year 2021” with the World Bank predicting “a contraction of nearly ten percent.”
Recently, the International Monetary Fund said the second COVID wave “posed downside risks to the Fund’s April forecast for 12.5% growth” and that the “IMF will revisit that forecast when it issued a fresh World Economic Outlook in July.”
Sovereign Ratings Outlook: Downgrade in the Horizon?
The negativity of these outlooks is not solely due to the pandemic. Ratings agencies and analysts can’t ignore the growing body of evidence that highlights increasingly poor governance by the Modi regime.
Fitch Ratings affirmed a BBB sovereign rating for India with “Negative Outlook,” noting the “Negative Outlook reflects lingering uncertainty around the debt trajectory following the sharp deterioration in India’s public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom. Wider fiscal deficits, and government plans for only a gradual narrowing of the deficit, put greater onus on India’s ability to return to high levels of GDP growth over the medium term to stabilise and bring down the debt ratio.”
Last week, Moody’s “slashed India’s growth forecast for the current financial year and issued a “‘Baa3’ rating on India with a negative outlook” noting “high debt and weak financial system constrain sovereign credit profile.”
UBS head of emerging market strategy, Manik Narain, told Reuters, “We do see the risk that it (a downgrade) can definitely happen… It seems more a question of when rather than if.”
Significant Contingent Liabilities
Constraining India’s sovereign risk profile are its significant and growing contingent debt liabilities. These arbitration awards – which Modi refuses to honor, driving up accruing interest — are putting downward pressure on the Modi government’s finances, including, most notably:
- Vodafone: US $2 billion
- Cairn Energy: US $1.4 billion
- Devas: US $1.4 billion
The impact is not only in dollars and cents. Confidence and trust – those vital but intangible ingredients that drive investment decisions – are withering with every day that Modi refuses to pay debts and respect arbitration rulings.
Delusion & Self-Deception
For international observers, the facts on India cannot be ignored. But Modi’s government exists in an alternate reality. Perhaps this quote from an unnamed Indian official summarizes the defensive, yet delusional nature of the Modi government on their decision to unlawfully terminate contracts, ignore international arbitration tribunal rulings and terminate over 50 bilateral investment treaties (BITs): “We have done an analysis. There is no correlation between BITs and the investments coming to the country. Today, we hardly have any BITs. But look at the flow of FDI and FPI (foreign direct and foreign portfolio investments) into the country. It is much higher.”
In reality FDI is in steep decline, the economic and financial outlook are bleak, and with a sovereign rating downgrade on the horizon, the Modi government needs to move with alacrity beyond delusion and self-deception.
Cheap Equities Does Not Equal Capital Inflows
A recent article in Fortune highlighted in that in 2020, “… FDI levels spiked in August, thanks in large part to equity inflows to tech giant Jio Platforms, a subsidiary of India’s largest company, Reliance Industries, the conglomerate run by Mukesh Ambani, India’s richest man.”
The Modi government would be mistaken to confuse someone buying Indian domestic equities when they are cheap the same as attracting job-producing direct investment from foreign investors.
A case in point: Argentina, which for a decade or more made the decision that it can exist outside the international financial system. This proved foolhardy.
Finance Minister Sitharaman knows the difference, and should not allow India to slouch toward Argentina.
FM Sitharaman’s Worry: A Collapsing Economy
Reuters reports that India’s “100 Years” budget is in trouble because of COVID reporting, “the lockdowns will start affecting tax collections by June, potentially lowering revenues 15%-20% from what was estimated for the quarter… With the projected fiscal deficit target pegged at 6.8% of gross domestic product and a soaring borrowing programme, delays in the privatisation plan and the anticipated shortfalls in tax revenues are already prompting cuts to some of the government’s previously earmarked expenses.”
FM Sitharaman recently told a gathering hosted by the Financial Times and Indian Express that “international arbitrations questioning India’s sovereign right to tax is a matter of concern, and to that limited extent, we are worried that it sets a wrong precedent.”
Given the seriousness of the economic situation India is currently facing, FM Sitharaman would be well advised to take more seriously the arbitral awards and the global enforcement proceedings that are underway, as India’s sovereign rating moves ever closer to junk status.