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Updated: August 8, 2011 11:38 IST

U.S. downgrade may force newer strategy

K. T. JAGANNATHAN
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Capitol Hill in Washington.
AP Capitol Hill in Washington.

The warning was there for long. It was coming. And, it arrived on Friday last. Rating agency Standard & Poor's finally executed its threat to take America out of the list of risk-free borrowers for the first time.

Even as the world is still evaluating the cascading impact of this extraordinary move to downgrade the rating for America from Triple A to AA plus, the U.S. Government hit back at the rating agency for its mathematical flaw in calculating the Federal debt. While conceding the error, Standard & Poor's, however, stood its ground and stuck to the downgrade decision.

China warning

The rating downgrade, predictably, has elicited strongest reaction from China, which has come down heavily on the ``debt addiction' of Americans. China, it may be mentioned, is the largest creditor of the U.S. Beijing is quick to seek a ``new stable global reserve currency''. Beijing's double-quick condemnation of the U.S. policies should also be read in the context of its growing business interest in America. Nevertheless, Beijing's belligerence in the wake of rating downgrade is bound to seriously hurt America's hitherto unchallenged influence in the global financial world.

Post-downgrade announcement, Standard & Poor's, too, has come under intense attack not just by a livid Obama Administration but also by long-time watchers of the rating agencies

. ``It's hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated sub-prime-backed securities are now declaring that they are the judges of fiscal policy,'' writes well-known columnist Paul Krugman in New York Times. Surely, this will trigger a side show of its own on the efficacy of the rating agencies.

Impact on India

How will this rating downgrade pan out in India? None is willing to stick his neck out and predict the future. ``There is no gain in making off-the-cuff remark now,'' cautions Union Finance Minister Pranab Mukherjee.

The $60 billion Indian IT (information technology) and BPO (business process outsourcing) industry is still assessing the long-term consequences of the impact of rating downgrade for U.S. The fiscal health of the American economy is known for all. The rating downgrade, as a consequence, should surprise none.

One view is that the markets and industry have already factored this aspect into their scheme of things. Most of the U.S. companies would have already taken a view on their spending. ``We feel that these firms will have to somehow maintain their existing businesses,'' points out a top IT industry source. Given this, the maintenance segment of the IT business could escape any adverse fall-out.

The Indian IT industry is also somewhat encouraged by the fact that most of the U.S. companies have large cash on hand.

Near-term confidence notwithstanding, the Indian IT industry is somewhat guarded on the long-term impact. ``The lag effect will show up some two quarters down the line,'' sources concede. But the retail Indian BPO could be hurt straightaway as the impact of the rating downgrade manifests in higher interest rate on home mortgage, declining travel, drop in spending on non-essentials and the like in the U.S. For, the revenue of these retail BPOs is directly linked to the volume.

Dollar reaction

The rating downgrade will also have definite consequences for trade. The immediate worry is that how will the dollar move. Any depreciation in dollar is going to hurt Indian exports. Any fall in dollar will make Indian exports uncompetitive.

Export-driven industries such as garments, handicrafts, leather, gems and jewellery could come under severe stress because of changes in dollar-rupee parity likely in the wake of rating downgrade. There is a positive aspect to it, however.

The imports (especially the oil bill) could turn cheaper should dollar depreciate. Besides the exchange rate change, the rating downgrade could hurt the overall consumption in the U.S., triggering further negative impact on imports into America. Though the macro numbers in India are still encouraging, the deceleration concerns have already started assuming vocal expression these days.

The latest dose of interest rate hike by the Reserve Bank of India has even drawn negative reactions across the canvass. Coming as they do, the latest series of actions on the U.S. front are bound to force the monetary and fiscal managers in India to re-adjust their policy prescriptions in a dynamic global environment, which is set for a major metamorphosis in the wake of Standard & Poor's decision to push America out of the risk-free borrowers' list. Will all these see an end to the high interest rate regime in India?

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