This past week, ratings agency Standards & Poor’s warned India that it risks a sovereign debt downgrade which would result in the country falling off the list of an investment grade country. Currently, India is rated at the lowest investment grade rating – BBB. Falling below this level would mean that India bonds would be considered junk bonds. Much of the blame is assigned to the Prime Minister, notes S&P, pointing out specific problems with the political system “that has more gridlock than the United States,” coupled with high inflation and a falling currency and GDP.
This downgrade would have severe implications on businesses in India. Funding of projects would increase and the risk and costs associated with doing business in India would also increase, lessening the likelihood of increased foreign direct investments.
India needs to make some changes to turn around the economy by taking some steps towards economic reform and unlocking the gridlock currently present in the political system. Or else, Indonesia could take over the ‘I’ in the BRIC countries, noted by many analysts. Indonesia (240 million people) is smaller than India (1.2 Billion) in terms of population but Indonesia is seeing higher stock market returns and better fiscal management with lower inflation.