S&P, India Inc overdoing gloom on economy? - The Economic Times
T T Ram Mohan, Professor, IIM-Ahmedabad
So you think India is doing badly? Sample this:
China's growth rate in the second quarter of the year is expected to dip below 7%. India's growth rate has tended to be, in general, two to three percentage points below that of China. If India were to grow at 5% in the second quarter, that should not be a great shock.
Brazil, another of the BRIC economies, grew by just 2.7% in 2011, down from 7.5% in 2010. The IMF projects growth in 2012 at 3%.
Among the BRIC nations, Russia alone is poised to maintain its growth rate in 2012 but that is because Russia has been growing in the past two years at a relatively slower 4%.
You can't say that China's growth has slumped because of 'policy paralysis'. China does not face the difficulties that a democracy does. To get a better clue to the slump, just see when was the last time that its growth rate fell below 7%. China's growth was 6.6% in the first quarter of 2009, which was the worst time in the sub-prime crisis, following the collapse of Lehman Brothers.
The ongoing eurozone crisis is similar in intensity and in the risk-aversion it has created in the markets. It must explain why China's growth has decelerated so acutely and also India's. It tells us that it is global factors that are primarily responsible for India's economy running into rough weather not coalition politics, lack of leadership, corruption, assembly elections or any of the things we have been hearing about.
Unfortunately, it's not just commentators who don't get it but rating agencies and a section of the business community. What the latter think does matter. Rating agencies impact the flow of capital into the country and the costs of borrowing. Animal spirits are everything in an economy and businessmen's prophecies of doom tend to be self-fulfilling.
S&P warned recently that India faces a downgrade in its rating if it does not get its policy act together. It had changed the outlook from 'stable' to 'negative' in April. Now another rating agency, Fitch, has followed suit and the reasons it has cited are almost the same as those advanced by S&P.
S&P has sought to articulate its case for a potential downgrade in a report tiled, Will India be the first BRIC fallen angel? A credit downgrade reflects increased possibility of default on debt. Where a nation's debt is overwhelmingly in domestic currency, the chances of default are lower because government can easily inflate its way out of high debt. It is high external debt that is cause of concern. India's external debt to GDP ratio of 3.4% must be amongst the lowest in the world. Does S&P believe that, in the absence of reforms, the probability of India's defaulting on foreign debt will rise?
Even on total public debt (domestic and foreign), India does well in comparison with many other countries. We are among the few countries whose debt to GDP ratio has been falling in recent years as the trend in advanced economies has been for the ratio to rise.
If there is little chance of India defaulting on its foreign obligations in the coming months, why would we qualify for a downgrade? The answer is provided by the criteria S&P uses for arriving at a sovereign rating. The company's website gives an idea of the variables used: a political score, an economic score, an external score (which reflects its external liquidity and international investment position), a fiscal score and a monetary score.
It follows that even if India's external score does not worsen to a point where there is an increased probability of default, a downgrade is possible if there is a deterioration on other counts. The S&P report foresees precisely such a possibility but the case is not persuasive. The link between the various scores that S&P uses and a higher probability of default is not at all evident.
The report contends that if the economic situation gets worse, India may actually reverse some of the reforms undertaken so far! Yes, if there is a major external shock that causes a balance of payment (BoP) crisis, the government may be forced to resort to capital controls, which would be a step backward. But does anybody seriously believe that the government would raise tariff barriers to protect Indian industry? Or that it will force public sector banks to restructure loans of public sector enterprises the way they have done so for Air India? Or that we will return to the era of reduced interest rates for particular sectors?
Unfortunately, despite the blows to their credibility in the sub-prime crisis, the rating agencies' reports get a huge press. A section of the Indian business community seems to have got carried away and has joined in the current bout of government-bashing. Azim Premji claims that India is "working without a leader".
At the G-20 summit in Mexico this week, the prime minister gave a fitting riposte: he announced a contribution of $10 billion from India towards the IMF's eurozone fund. At a time when India's BoP is coming under strain, the PM's gesture was a ringing assertion of confidence in the nation's ability to surmount its current economic challenges.
It is possible that India Inc does not share the aam-admi orientation of the UPA government. It may well yearn for a government that would cut back social sector spending, slash subsidies drastically, water down the current position on land acquisition and environmental clearance. It is entitled to its preferences and is free to argue its case. But to create despondency and negativism about the economy is not responsible advocacy.
well some expenses have already been made namely admission of my son to school.
