Slow & Ponderous

Even by the standards of rating agencies, Standard & Poor's latest upgrade of India's foreign currency outlook to positive is woefully behind the times.

When the country was the toast of the international investment community, when the central bank was desperately trying to cope with the flood of dollars pouring in, when the country was pre-paying its external debt, and when the rate of GDP growth was scaling new highs, S&P failed to take notice.

It had lumped the Indian economy in the same category as civil-war-torn Colombia. But now, just when forex reserves have been dipping, when growth is decelerating, and when inflation has jumped to a three-year high, S&P has decided to revise its outlook upwards, while keeping the BB rating intact.

The long-term outlook on both foreign currency and local currency has been revised, the former from stable to positive, and the later from negative to stable. S&P says that the rationale for its improved outlook is the country's "resilient external position", thanks to high forex reserves, growth in exports and a low debt-service obligation.

For the local currency, the rating agency says that the country's GDP growth is likely to be over 6 per cent over the medium term. None of this is news, and research houses have been selling precisely this story to investors all of last year.

The last time around, S&P had cited the lack of political commitment to reforms, including the lack of a value-added tax, and the inability to recover costs in public services, especially energy costs, as reasons for not revising the country's ratings. There has been very little real progress on these fronts.

In fact, the outlook for reforms has got more clouded after the formation of a new government at the Centre. S&P continues to draw attention to the risks of a failure on the fiscal front.

It points out that interest payments are likely to consume about a third of government revenue, that the consolidated debt of the Centre and the states will be an unsustainable 9 to 10 per cent of GDP, and that contingent liabilities too are high. It notes: "The government has a propensity to support financial institutions and loss-making state-owned enterprises, including the decrepit electricity sector."

Against this backdrop, the upward revision of the rating outlook comes as a surprise, specially when seen in the light of the fact that almost all forecasts predict lower growth for the world economy in 2005.

However, it would be churlish to blame S&P for seeing the positive side of the Indian economy at a time when we are inundated with so much bad news anyway. "Better late than never" would be the right response.

Rating agencies came in for a lot of criticism after high-profile failures in forecasting default: Enron was rated investment grade four days before bankruptcy; Californian utilities were rated A- two weeks before defaulting, and WorldCom was rated investment grade three months before filing for bankruptcy.

Sovereign ratings have also proved to be mistaken, the downgrading of Malaysia after the imposition of capital controls being one such instance. Perhaps rating agencies need to introspect and come up with swifter responses to better reflect economic realities.