Everyone knew that India's situation is precarious. Lack of reforms, rising fiscal deficit and lack of focus from a dream-team that brought in first wave of reforms. So it is hardly a surprise that India's rating outlook is changed to negative. It is made big news, was shrugged off by the markets. But it deserves a few comments.
It ratifies that India's policy direction has reversed signifying the third phase of reform process - reversal. Between 2001-2004 the direction of policy reform was positive. Between 2004-08 there was a policy logjam, primarily attributed to stifling policy of the Left parties. However, post-2008 the policy environment has turned adverse despite no participation by Left in present government.
The current policy environment is typically familiar territory of Congress party - it is a poisoned policy environment. There are arbitrary decisions (Spectrum allocation), abnormal legislations (retrospective tax liabilities), populist measures (NREGA, reversal of first fare hike in 8 years in Railways), arbitrary intervention in infrastructure sectors (under the heading of environmental clearances - POSCO deal), gross corruption aimed at filling the party coffers (commonwealth games scandal), disregard for law and order particularly by government, etc.
To top it all, no change of policy-scene is likely in future despite the promises of finance minister and Prime minister. These people were not waiting for S&P to turn negative before bringing in the main reforms. They do not want reform.
For everyone, investors, general public, firms, foreign investors etc, consistent long-term strategic direction about policy is more important that precise current policy regime. It is immaterial if you have high fiscal deficit, but it matters if you have no plan to come out of such deficit. It is immaterial if there are high taxes so long as there is a progressive clarity in tax laws and consistency in application.
In all, the only change possible is that this government is defeated and subsequent government will bring in a clear long-term strategic view to policy making.