Indian Express Opinion November 11, 2011
Winter session bluesShare
Tags : editorial, indian express
The bad news just keeps on coming. The US-based ratings service, Moody’s, has downgraded its outlook for India’s banks — marking it now as “negative”, rather than “stable” — because of concerns about the financial system’s asset quality, capital adequacy, and profit-making. While the heads of India’s largest banks sound pretty incensed — and the ratings oligopolies have not exactly covered themselves with glory in the last few years — this is nevertheless a strong message: the world is turning bearish on the India story. And it would be foolish not to recognise the real effects of the outlook downgrade: the rupee has depreciated further, as foreign investors lose confidence in Indian investments.
That, in turn, makes it unlikely that the softening in global crude oil prices will be felt in India, as that reduction in dollar terms will be cancelled out by the weaker rupee. That means that Indian Oil Corporation, which reported its worst ever quarterly loss on Wednesday, is unlikely to be cutting petrol prices any time soon, keeping cost pressures high. Indeed, since IOC is making a loss on each litre of petrol sold, its chairman is speaking darkly of shutting refineries and cutting back on supply. If that happens, there would be the possibility of shortages — and blackmarketing. Additionally, car sales showed a steeper decline in October — the month of Diwali, usually big for retail — than they have in any other month for 10 years. This is a major indication that the lack of confidence is seeping through to aspirational India, and the strong domestic demand that allowed this economy to ride out the global recession is not something that should be taken for granted any longer in these uncertain, inflationary times. In short: growth could take a bigger hit than anticipated.
So that lack of confidence will hurt growth; and it is the concern that growth is sharply weakening that topped Moody’s reasons for downgrading its outlook on the Indian financial sector. The economy is thus showing signs of spiralling downwards. Nor are there any fiscal or monetary tools left; the Centre is overstretched, and the RBI is dealing with inflation. Simply put, there is absolutely no alternative to extremely drastic reform measures that would put growth back on the agenda. The winter session of Parliament begins this month. It is UPA 2’s last chance to save the India growth story.
