The decision taken by ratings agency Standard & Poor’s (S&P) not to upgrade India or change the outlook to positive is disappointing. It has also been stated that it is unlikely to happen next year, which means that 2017 would be the earliest date that one can hope for a change. The rating for India has always been on the precipice of investment-grade bordering on junk status, with innuendos of a downgrade made whenever there is an impasse in Parliament. How is one to view this?
The challenge for most emerging markets is that once they start from a low rating, it becomes hard to move upwards, and the preconceived notion of ‘economic stratification’, analogous to the social hierarchies in Indian society, comes in the way. Hence, while there can be very strong arguments to support the fact that India should be in at least the ‘A’ category, once in the ‘BBB’ grade, movement upwards is hindered by the rating’s stickiness.
A country rating has to be looked at from the point of view of how the country performs over a period of time on various parameters. India’s economic growth has shown resilience over the last three years and notwithstanding the decline in the investment rate, the barriers that came in the way of growth have been resolved to the extent that there were policy decisions to be taken. Inflation has come down, and RBI has geared its policy towards targeting the CPI number. The balance of payments looks much healthier today with a net accretion of foreign currency with capital flows dominating this accretion. But, more importantly, one can confidently say that the worst is behind us and that there can only be improvement from hereon.
While investment could be a dark spot in our performance, it is also true that such spending has slowed down in almost all countries as the global economy is on the downward path and hence it is a universal phenomenon. The fact that the Indian economy is still sharp in comparison hence becomes important furthering the argument for an upgrade.
This leads to another way of looking at a country rating, which is a peer comparison made with other emerging markets or even developed countries. Now, going by the IMF or World Bank or UNCTAD reports, India appears to be fastest-growing economy, reckoned on the basis of the GDP calculation now common to all. A number of above 7% is impressive and the forecasts too are in a higher range from 2016 onwards. This also supports the hypothesis earlier that things will only look up from now.
If one looks at the way in which the economy has withstood shocks that emanated from extraneous forces starting from the tapering programme of the US Fed to the yuan depreciation, the rupee turned out to be one of the best-performing currency. No doubt, the astute policies of both the finance ministry and RBI helped in restoring stability almost immediately after the shock. In fact with the help of other factors, such as low commodity prices, India’s external account looks very strong and resilient. Hence, compared globally, there can be a strong argument for an upgrade based on past, current and future perspectives.
One of the best ways to judge the perception held of any country is foreign investment. The Financial Times recently reported that India was the largest draw for FDI; this is significant not because of the numbers, but because the flow of such investment continues to be in the region of $35-45 billion on an annual basis. This also means that investors who are putting in their money in any country do so irrespective of the country rating and they do not find India less exciting because of the BBB grade. Opening up of sectors like defence and railway equipment or the relaxed limits for investment shows that the country is also eager to get more foreign investment. The WEF’s Global Competitiveness Report also reflects the country’s increased competitiveness with its rank improving to 55 from 77 in one year—this should definitely show somewhere in the country rating. Going by the theory of revealed preference, India does gain favour of foreign investors.
On the domestic-side, a lot has happened beyond the GDP-growth number. The government, over the years, has shown the determination to move along the fiscal responsibility path and contain fiscal deficit. Further, subsidies (food and fuel) have been rationalised and the impasse in telecom and coal cleared. This has been supplemented with a plethora of reforms in labour, banking, monetary policy target agenda, etc. While it is true that GST and land reforms remain part of the unfinished agenda, surely this cannot come in the way of an upgrade given that every country would have issues that may be red-flags from the pint of view of a ratings agency, but have to pass through the democratic processes.
Interestingly, the three issues flagged often: capitalisation of public sector banks, losses of SEBs and fiscal deficit are all inter-related as the onus falls on the government to maximise this function. So far, it has been done within the fiscal space afforded by both the central and state governments to ensure that the FRBM path is not violated in any way. While it is argued that the debt level is high, at around 70%, it should be remembered that it is largely in rupees and hence does not pose any threat. But even other higher-rated countries have issues on the fiscal side, with spending on healthcare, for instance, that put their accounts under pressure.
Does the rating matter for the country, considering that there is no national borrowing in the global space? It affects companies that seek to raise funds overseas as the sovereign rating becomes a barrier. Second, as we are looking to internationalise the rupee, the country rating would be a consideration, especially if, say, a rupee bond is being raised in the euro market. Third, the country rating has become a prestige issue; rating classifications have now assumed the same significance as “third world/first world”, etc. Last, it does affect some investment decisions where calls on the destination of such funds are based on the country rating. Hence, while we do get in a lot of foreign investment, it would be better in case we moved up the alphabet.
But, at the ideological level, the process of assigning sovereign ratings should be reviewed and not be intransigent when it comes to emerging markets.
The author is chief economist, CARE Ratings. Views are personal