A rating cut is painful for the affected party and unpleasant for the rating agency. Certainly, in today?s civilised world, the bearer of ill tidings does not run the danger of having his head separated, but he can hardly hope for much popularity. That however is precisely the job of the rating agency, like Banquo?s ghost ? uninvited testimonial to the ill deeds of yesterday. Like others, we Indians, a nation of 1 billion, a putative great power, fulminate at importunate downgrading.
The typology of the language of denial is revealing: (a) ?What?s new about it? We all know the fiscal situation is bad? (b) ?But we are working on the problem? and finally (c) ?It won?t make any difference?. The truth always cuts to the bone, just as untruths never do. We know that the fiscal problem has remained largely unattended and it is getting more and more difficult to manage. Read the government?s Economic Survey, the Reserve Bank?s Annual Report, and such like. Just as we know that the efforts to tackle the fiscal imbalance can perhaps honestly, if impolitely, be termed pusillanimous.
In 1995-96, the combined fiscal deficit of the Centre and the states was 6.5 per cent of Gross Domestic Product (GDP). After seven years of working on the problem, the figure has risen to 10.5 per cent. Add to that the huge cash losses being made by public power utilities amounting to another 1.5 per cent of GDP, and you have a government sector deficit of around 12 per cent of GDP. Much greater than the rate at which GDP at current prices is growing (under 10 per cent). According to tradition, these parameters indicate unsustainable conditions, even with zero interest rates. But that is a static interpretation and it is certainly possible to turn things around, and fairly quickly, provided the will exists. Unfortunately, it is this ingredient that seems to be in short supply.
Standard & Poor?s, while cutting its rating on local currency debt to BB on 19 September 2002, said that the action reflected ?the government?s growing Indian rupee debt burden and its inability to staunch the financial weakening of the public sector.? An S&P spokesman on TV referred to the contingent liabilities of bailouts. Over a year back, on 8 August 2001, Moody?s while cutting India?s outlook from stable to negative Ba2 wrote that ?the downward pressure on the government?s domestic currency rating arises from the absence of a coherent and realistic strategy to curtail the budget deficit…Chronic failures to meet deficit targets, disappointing delays in privatization…and growing contingent liabilities on off-budget appropriations have raised concerns that fundamental adjustments will only come in an atmosphere of crisis,? and underscored the problem of ?recurrent public sector bail-outs?. A year is not even a blink of the eye in ancient Bharatvarsha.
It is nobody?s argument that India is a basket case. Much has changed for the better. But in public finance, those at the helm of affairs seem to weigh the political costs of doing the needful ? namely serious expenditure control and aggressive sale of assets ? to be not worth the while. In part, the very successes ? in exports, in IT, a modest but respectable rate of growth, and in several aspects of macro-management, especially reduction of inflation ? combined with a generous dose of scandals that has conveniently helped push the fiscal problem into the background.
The RBI has been able to manage a ?soft-interest regime? because we have capital controls. The Indian saver is in a classic buyer?s market: he has got to accept what he is given. But the rot spreads. Instances of delays in servicing contractual obligations by state governments are on the rise. The possibility of crisis is inherent in any strategy that puts things off, till a crisis happens. Finally, Korea, Malaysia and Thailand, four years after the Asian crisis, all have local currency ratings in A or near-A category, way above ours. Surely, there is more mileage in doing less of denying and some more of doing.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)
