Standard & Poor’s has downgraded the outlook for India’s long-term rating for sovereign credit and for some companies from “stable” to “negative”. However, the rating is retained at the lowest investment grade. It is supposed to affect bond floatations, which, in any case, are not expected to be large in the near future. Lenders of syndicated loans have their own assessments based on the fundamentals of the economy and companies. Further, in the past, the below-investment rating did not prove a handicap in attracting foreign capital. The hollow expertise of rating agencies was exposed during the South-East Asian meltdown and in the shenanigans of the sub-prime crisis.
From the interaction with many rating agencies that I had during my service with the RBI, I can say that the one common factor among them is that they are not transparent in their methodologies. Questions asked in this regard did not elicit any meaningful response. In the latest review, “high government debt burden and deficits” have been given as the reasons for the downgrading. Still the same criteria is not applied to the US and Japan, which have AAA and AA ratings.
The financial sector in the US is in a shambles. Its twin deficits (fiscal and BoP) have been ballooning year after year. President Obama has proposed a budget showing a record deficit of $1.75 trillion amounting to 12.3 per cent of GDP. Standard & Poor’s points to the strength of the greenback as the key currency for global trade and the world’s reserves as the major factor for the strong rating. However, there is already a discernible trend towards non-dollar currencies in the composition of the exchange reserves of important countries.
Japan’s public debt is 180 per cent of GDP against India’s 80 per cent. S&P has said that it has kept Japan’s sovereign credit ratings unchanged because of the country’s “robust net external asset position”. Besides the external assets, it has cited a diversified economy, a relatively sound financial sector and a high savings rate as pluses for Japan. Can one not say the same about India? Its reserves constituted 128.6 per cent of external debt and debt-service ratio was 4.3 per cent, at the end of September 2008.
The US and Japan are in recession while India talks about growth albeit at a lower rate.
A Seshan, Mumbai