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Rubbishing the S&P rating

By S. Swaminathan

International credit rating agencies are not exactly known for their objectivity much less empathy with developing countries. It is not well known that agencies such as Standard & Poor's often make do with partial or incomplete information about the developing countries and that their assessment of the credit standing of these countries is based on standards or criteria which are not so very appropriate for these countries. Seen in this perspective, the recent S & P downgrading of India's rupee debt from an "investment status'' down to a "junk status'' is not to be read as the end of the road for the Indian economy.

There is nothing of a revelation in the S&P assessment. There is no doubt that the fiscal trends in India have not conformed to what the multi-lateral financial institutions have long considered to be "inviolables.'' It is to be considered that the record of fiscal management in India in recent years has not been creditable. The policymakers have been struggling to mend matters but without substantial progress.

India could do better if only the internal debt explosion could be contained.

But what is much more important to note is that the S&P perception is coloured by the unimpressive efforts made by India to prune public expenditure and to increase the revenue mobilisation with all the pressures exerted by the funding needs for public investment in infrastructure projects and in the social sectors.

The reactions in India to the downgrading of the rupee debt have been uniformly critical about the S&P approach to the overall debt scenario.

The Finance Secretary, S. Narayan, has come out with quite a telling rebuttal of the assumptions underlying the S&P rating. He has ruled out the possibility of the downgrading adversely affecting the economy. He has pointed out that at the very time when the fiscal trends are showing some improvement, S&P has chosen to sound misgivings about the economy.

But this is not to say that the fiscal deficit of the Union and the State governments put together at nearly 10 per cent of the GDP or that the debt to GDP ratio at 48 per cent indicates a wholly comfortable position.

Both the Finance Secretary and the industry and trade bodies have described the macro-economic fundamentals as being robust and comfortable. The reference here is to the foreign exchange reserves at more than $60 billion, and to the low level of inflation at around 3 per cent, apart from ample public stock of foodgrains at 60 million tonnes.

All this is true but what cannot be glossed over is that the economic policy regime seems to have reached a blind alley. Rightly or wrongly, S&P have extrapolated the current impasse in the disinvestment process to sound the alarm bell.

It is perhaps also true that the S&P rating has been manipulated by U.S. interests in getting the disinvestment process moving and in securing a favourable decision on the Coca-Cola, apart from pressuring India towards an Open Sesame policy on foreign direct investment.

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