S&P rating: a minor irritant

By S. Swaminathan

The international credit rating agency, Standard & Poor's, has downgraded the outlook on India's long-term foreign currency credit rating, from ``positive'' to ``stable''. The immediate reaction, in official circles, is bound to be defensive although the Union Finance Minister, Mr. Yashwant Sinha, has not yet come out with any response unlike on a previous occasion when he pooh- poohed another credit rating agency's evaluation of India's external credit credibility with a dismissive phrase. It is not that credit agencies are infallible nor that the grounds on which they assess the eligibility of a country for foreign credits are always rational.

Reasons for revision

The S&P downgrading of India's credit rating this time, on the eve of completion of one year in office by the NDA Government, could cause embarrassment to it in the sense that the revision can reasonably be interpreted as a reflection on its economic governance. Media reports suggest that the S&P current assessment of India is largely based on negative perceptions by the agency with regard to the progress of economic reforms. That a consensus continues to elude the political establishment even on the broad contours of the so-called ``second generation of reforms'' is certainly not a breath-taking discovery by the S&P. Nor is the view that despite much posturing by the Vajpayee Government, reforms of the public sector and disinvestment in particular have not moved forward, totally unwarranted.

The S&P scepticism regarding the fiscal outlook could, however, be anchored in a dogmatic rather than realistic expectation that the Government's overall fiscal deficit can be contained at the level originally projected - 5.1 per cent of the GDP. Even if the revenue and expenditure trends for the first five months of the current year have shown that fiscal deficit this year has remained lower at Rs. 36,447 crores at the end of August as compared to Rs. 48,126 crores last year, it is not difficult to see that pressures on Government's finances will grow as a result of the international oil crisis and because of increased devolution of funds by the Centre to the States aside from demands on account of relief for States affected by floods.

Granting that the fiscal situation is not all that impregnable, the S&P outlook presumably linking a deterioration in fiscal deficit in the near term to a likely weakening of the balance of payments on current account (even otherwise prone to constraints on account of the ballooning of the oil import bill from $10.5 billion in 1999-2000 to around $16 billion this year) appears to be somewhat over-stretched. Even a worst case scenario on the BoP front would not suggest a current account deficit exceeding 1.5 per cent of the GDP, as compared with 0.9 per cent in 1999-2000.

The RBI perspective

The mid-term review of Monetary and Credit Policy for 2000-01, released by the Reserve Bank of India earlier this week, has the customary macro-economic overview as its first part. It would be interesting to see whether the country's central bank reads the economic situation the same way as the global credit-rating agencies such as the S&P do. On the fiscal situation, the RBI statement is not too categorical. Is there an improvement in the fiscal situation? Yes, indeed an encouraging improvement, says the RBI. In so far as the Centre's fiscal deficit up to August 2000 is ``reported'' to be ``significantly lower at Rs. 36,447 crores, representing an improvement by 24.3 per cent compared to last year.''

The RBI acknowledges that the improvement in the fiscal situation has come about as a combined result of tax revenue buoyancy and only a marginal increase in expenditure. So far so good. The situation could change. As the RBI looks at it, there are two major uncertainties that could adversely impact on the budgetary outlook. The first is the continued non-performance by the Government with regard to the heroic agenda of disinvestment. The second relates to the bulging oil pool deficit and the draft that will be additionally called for, on the budget, for dealing with the deficit. It is strange but true that the RBI has not chosen to caution the Government not to make a virtue of budgetary exactions in lieu of a necessary hike in the administered prices of petro products. Is it because the central bank believes that political sensitivities of the Government rule out any sage counsel on the matter?

Leaving this aside, the RBI pronounces its ultimate judgement: ``Notwithstanding these uncertainties, it is absolutely essential to contain the borrowing programme within the budgeted levels.'' Even such an exhortation is questionable at a time when levels of investment in the economy seem to be severely constrained and its appropriateness in the context of the escalation in oil prices would appear to be dubious. To what extent fiscal fundamentalism can go is exemplified by the RBI statement which follows. ``In fact, a reduction in the borrowing programme would be desirable as it would make a positive contribution to keeping the interest rate outlook positive and stable.'' Is Mr. Sinha willing to respond to this piece of Washington-consensus or its replay for the `n'th time?

Between S&P and the RBI, which is more sceptical about the fiscal outlook in India for the reminder of 2000-01?

Outlook for current account

Unlike the S&P which apprehends distinct deterioration in the current account deficit in the near-term, the RBI sounds sanguine about the situation. Despite the substantial increase in the oil import bill, says the RBI, ``increase in exports and invisible receipts is expected to keep the current account deficit for 2000-01 at less than 2 per cent of GDP, which is considered reasonably satisfactory.'' Do not mind the language, the typical play-it-safe bureaucratic style, the RBI is not inclined to subscribe to any crisis perception so far as the BoP situation is concerned. After all, the forex market is listening intently!

For policymakers in the NDA entourage, the message of the S&P rating is simple. ``We are not too much impressed with the way you seem to be stuck with the reform agenda. Take it or leave it.''

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