Risks for the Indian Economy

Moody’s analyst Aninda Mitra says that the risks facing the Indian economy have grown, due to high oil prices, increasing fiscal deficits (including off-budget items) and “pent-up price pressures.” The government’s ratings (Baa3 for foreign currency and Ba2 for local currency) are unchanged, but under scrutiny. The risk is of tighter monetary policy and a “sharp deceleration in growth.”

Meanwhile, Fitch Ratings recently reduced its outlook on India’s long-term local currency borrowings in to “negative” from “stable” because of the government’s worsening fiscal position.

Interestingly India has never come close to defaulting on its domestic debt. The risks are to investment and growth. Tax receipts continue to be strong, but expenditure quality has not improved. Pushing ahead with financial sector reforms may be a politically feasible way to get some more efficiencies into the economy, and counteract the problems with inflation and deficits.

Note that the increased risks are not of an external crisis, but problems with sustaining growth. I think the Indian government has a large number of policy reforms to implement that can fuel domestic growth, by giving the private sector more room to expand.

After four years of worrying mostly about equity, the government should push for policies that will allow the economy to grow out of its problems.

2 Responses to "Risks for the Indian Economy"

  1. Mayank Choudhary   August 5, 2008 at 1:06 pm

    All Indian dispensations have been far too bullish on the growth of the servise sector(owing little to their merit), thus hampering the relative potential growth in the manufacturing sector.Put simply – most of the service sector growth is from the IT and knowledge based Industry . Governments don’t realize however, that Inida has a large (the largest in the world) uneducated population, which is incapable of contributing to the service sector in a big way. And less has been done to promote reforms in manufacturing. India is fast becoming a high cost economy with relation to costs like – real estate, regulatory costs, Infrastructure cost (rather the acute lack of Infrastructure spending, thanks to the long awaited corporate bond market to its rescue agin owing to lack of reform) and even quality labour cost. The last is what we can most certainly not afford in a populous underdeveloped country.

  2. Nirvikar Singh   August 9, 2008 at 12:55 am

    Thanks for the observations.You might like to look at my paper on “services-led industrialization” in India.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=951735