A V Rajwade: India's credit rating

WORLD MONEY

It's not fair to determine the rating only on the fiscal deficit, overlooking all other changes in the economy.

After reading that Standard & Poor's has retained India's rating below investment grade, I was reminded of an old joke. There was this violinist who would play only one note on his instrument. One day, while dropping a few coins in the hat kept open for the purpose, a donor asked him as to why, unlike other violinists, he plays only one note. His answer was that the others are still searching for the correct place, while he has found it and, therefore, sees no need to change the location of his finger on the string.

Like that single note-playing violinist, Standard & Poor's seems to have found the one correct spot on which to judge India's economy and base its rating "" it is the fiscal deficit (the press release discusses no other point). Strangely, we were investment grade on the eve of the 1991 balance of payments crisis, downgraded to below investment grade (BB+) in May, 1991, and remain there now for foreign currency rating! (Such admirable consistency!) It boggles the mind.

It would seem that all the other changes in the economy are of no relevance whatsoever to the country's credit rating. The fact that the present value of the external debt is just about half of the external reserves, that the country registered current account surpluses for a few years recently, that it has an enviably rapid and consistent GDP growth record, that institutional investors are giving a resounding vote of confidence in the economy, that inflation remains reasonably low despite record high commodity prices, that ... but why bother about minor details when you have found the right spot on your violin's string as Standard & Poor's seems to have? It is so much more comfortable to harp on that one point, and keep the Indians in their (below investment grade) place "" they should be happy with the "positive" outlook!

In a way, one feels sad at having to make such bitter comments "" if only because I was myself connected with the rating industry for 15 years as a director of Crisil. (Incidentally, Standard & Poor's has taken majority control of Crisil "" obviously the below investment grade rating does not stand in the way of its own investment decisions!). I also recall a conference in Kathmandu in the late 1990s when Shankar Acharya had expressed surprise at the continued below-investment grade rating of India, despite the sharp improvement in the external situation. The position today is much, much stronger, and yet....

But talking of the external sector of the economy, the third quarter balance of payments data released last month by RBI, have intrigued me. For several quarters, the current account had been deteriorating rapidly and the deficit in H1 2005-06 was itself double the deficit in the whole of 2004-05. At the end of the third quarter, however, one finds that the deficit is more or less unchanged from H1. I have pondered over the data released to understand how exactly the deteriorating trend has been arrested. I remain intrigued.

Economic nationalism: Even as many countries in the world become more xenophobic, and anti-foreigner, two recent developments are worth pondering over. The first is from Zimbabwe "" a few years ago, the government expropriated huge agricultural lands owned by white farmers for distribution to the majority black community. In a short time, Zimbabwe, from being the bread-basket of southern Africa, became its largest food importer. In a humiliating comedown, the government now intends to give the land back to the white farmers. An earlier parallel to this also comes from east Africa. Idi Amin threw out the Indian immigrants in Uganda and expropriated all their assets without any compensation. (Many of the expelled Indians, holding British passports, came to the UK in the early 1970s, and have become even more prosperous.) The Indians were controlling much of the country's trade "" external, wholesale and retail. After they were expelled, the economy suffered a sharp set-back and, a couple of decades later, Idi Ami n's successors invited them back to Uganda restoring their properties and assets.

It is not as if only the poor, undeveloped societies need foreigners. The rich countries, whether in Europe or the US, have always depended on immigrant labour to do jobs which the locals did not want to "" not at least at wages the immigrants were willing to accept. Not all these immigrants were legal, but the economy's dependence on their labour is at the heart of the current debate in the US about legalising all illegal immigrants from central and south America, particularly Mexico. This is, of course, not to justify encouragement of illegal immigrants as vote banks "" Buddhadeb Bhattacharjee's measures to curb illegal immigration from Bangladesh have been both virtuous and popular!

But generally, rich or poor, neither seems to afford economic nationalism or anti-foreigner hysteria, in FDI or otherwise.

vrco@vsnl.com