The international credit rating agency Fitch has lowered the outlook for India’s sovereign rating to “negative” from “stable”, saying that high inflation, the lack of progress in fixing the fiscal deficit, and stalled reform required that action. While there are many reasons why credit rating agencies have lost credibility since the crisis of 2008 – not least their seeming inability to accurately judge the risk of default, which is rationally still negligible with India – they can at least still serve as a marker of investors’ lack of confidence in the India story. Fitch has followed Standard & Poor’s in suggesting that high inflation and a weak global economy mean that there is “an even greater onus on effective government policies and reforms”. In any case, that the country’s macroeconomy has taken a turn for the worse over the past year is hardly possible to deny. Fitch went so far as to say that India is entering a period of “relative stagflation” thanks to a slowdown in fixed investment. While none of this is news, it is important that the government recognise that it is continuing to lose the battle for investor sentiment. Such downgrades – including any potentially worrying move from investor-grade to junk-grade status – can only be avoided if the government shows it means business.
The imminent departure of Pranab Mukherjee from the finance ministry provides UPA-II with an opportunity to completely change the conversation. A new economic team, free of the burden of the past three years’ mismanagement, could make a significant difference. However, this can best be done not in the traditional sarkari style of re-examining all the decisions already made or announcing grand new policies, but by working harder to implement the agenda that has already been developed. The lack of confidence in New Delhi comes not from its inability to frame policy, but from its lack of application in putting those policies into practice.
The new team’s priorities are already clear, and have often been delineated as the “to-do” list for the Centre. It should prioritise tax reform, by ensuring the goods and services tax and the direct taxes code are finalised in the next six months to a year. Sectors suffering from backwardness or a severe slowdown – such as retail, pensions insurance, and aviation – should be allowed to tap foreign direct investment, so that external liquidity can allow for greater investment, and so that newer methods and processes can be imported. Administered prices of petroleum products must be aligned with world prices, so that pressure eases on the current account deficit and the fisc. Meanwhile, infrastructure bottlenecks for the coal and energy sector must be addressed immediately. These are all steps that can be taken forthwith. In the medium term, the vexed question of land availability needs attention, and the Centre must push through its enabling land acquisition legislation, while keeping the political and moral necessities of resettlement and compensation in mind. And service delivery must be revolutionised through incorporating the Unique ID system, to plug leakages that bloat government expenditure, and to ensure that welfare spending reaches India’s neediest. This six-point agenda is the bare minimum that a new team should focus on — and it is also the best way to alter sentiment about India’s growth story before it does any more damage.