What are the economic fundamentals of the two countries? Goldman Sachs predicts negative growth of six per cent for Thailand in 1998, a contraction in manufacturing production, and points to the impaired capital base of that country's financial system. Thailand's gross external debt is estimated at 80 per cent of its gross domestic product (GDP) by end-1998.

In contrast, Indian GDP growth is expected to be five per cent of GDP, while we have neither capital account convertibility nor a tottering financial system. Our external debt as a percentage of GDP is estimated at around 28 per cent. Our rating is only marginally above Russia's, a country teetering on the brink of bankruptcy, and with years ofnegative growth.

Colombia, which is forecast to have a current account deficit of over five per cent of GDP, has a Baa3 rating from Moody's. South Africa, whose foreign exchange reserves by end-1998 are forecast at about 11 per cent of gross external debt by ING Barings, is also rated Baa3, although S&P gives it the same rating as India.

Clearly, ratings are far from being determined on the basis of economic criteria alone. In Moody's downgrade, they have spoken of "government restrictions on non-Indian participation in the divestment of public sector enterprises".

But foreign institutional investors are free to apply for shares, while there has also been some talk of divestment through the GDR route. Putting all these arguments together, it looks pretty obvious that the rating agency is adding its mite to the weight of US sanctions. The timing of the downgrade and the decision to lower India by two notches instead of one also tend to emphasise the same point.

To be sure, the downgrade will makeIndian paper even more expensive, and will effectively seal off access by Indian corporates to foreign credit. This could have two effects-either projects are shelved, or the borrowing is local. Borrowing in the domestic market could put upward pressure on interest rates. The cost of capital for corporates will now be higher.

Clearly, the solution would be to negotiate on the sanctions, while making foreign direct investment more attractive. At the same time, it needs to be emphasised that foreign capital can at best be a fringe player in a country as large as ours, and there is no alternative to increasing both the quantity as well as the quality of domestic investment.

There are always two approaches to any adversity. One is to moan about the unfairness of it all and start kowtowing to the vested interests abroad that are bent on bringing the country to its knees. The other way is to convert the adversity into opportunity and lay the foundation for a stronger economy by proceeding full speed ahead withinternal liberalisation on all fronts.

The PSU divestments should be speeded up to bring in more resources and liven up the capital market-even if it means giving shares cheap to the public.