Not so misplaced impatience

S&P downgrade is a timely alarm bell

Union finance minister Yashwant Sinha did not clearly think through his answer when he told The Financial Express that Standard & Poor’s decision to downgrade India’s local currency sovereign credit rating and categorise the outlook on India down from “stable” to “negative” was the result of “misplaced impatience”. If Mr Sinha had only taken a more objective view of what S&P had said in its press release announcing the downgrade he could easily have used the rap on the knuckles to get some internal fiscal discipline within the government, both centre and states. Mr Sinha had himself drawn the attention of Parliament and the nation through his budget speech earlier this year to the parlous state of public finances. The Union finance ministry’s Economic Survey and the Reserve Bank of India’s annual report as well as the report on state finances drew pointed attention to the problem of rising fiscal deficit and internal debt. The response of market analysts has been along more understandable lines. Many have suggested that the market has already discounted the factors alluded to by S&P in their downgrade decision.

Yes, indeed, S&P can in fact be faulted for coming out with their warning too late in the day. Mr Sinha would have been on track if he had responded to S&P’s announcement with a “so what’s new” retort. Even now, the government must raise the danger signals on the fiscal front, convene a special meeting of the National Development Council to alert state chief ministers to the seriousness of the fiscal challenge facing the economy. S&P’s announcement is going to be followed pretty soon by a similar announcement by the other US-based credit rating agency, Moody’s. The problem of internal debt and high fiscal deficits is not a new problem. It has been around for some time now. However, at least one important reason for the downgrade at this point is the perception abroad that the fractious National Democratic Alliance (NDA) government and the wayward state governments are unlikely to get their act together in improving public finances. Action in such critical areas as imposing user charges for public utilities, disinvesting in non-core sector public enterprises and improving public finances has been inadequate to stem the fiscal rot.

The macroeconomic numbers may not have changed over the past four months to warrant a downgrade, but the political environment has certainly deteriorated. It will be useful to recall that when Moody’s and S&P downgraded India’s rating in August 1990 and quickly followed this up with successive rounds of downgrading between August 1990 and May 1991, the driving factor was the growing “political risk”. It is politics that is once again playing havoc with the economy. Rather than downplay the S&P downgrade, Mr Sinha must use it to get the Prime Minister and the NDA government to single-mindedly focus on improved economic governance. A threat can then be turned into an opportunity. Ostrich-like behaviour will not help.