India deserves better
Yes, India is performing worse than before, but it’s still performing better than most other countries and certainly better than many ranked ahead of it
Summary Judgement | Prashant Agrawal
Standard and Poor’s (S&P) placed India on a credit watch last week. Credit ratings matter for governments looking to raise money, investors investing and banks and corporations borrowing and lending. And a closer look at India’s rating shows that it should be higher not lower.
Few would disagree with S&P’s assessment of India’s economic and fiscal situation. But India is miles ahead of countries S&P rates higher. S&P rates India as BBB-, in the same league as Peru, Morocco and Iceland. Spain and Italy, two countries suffering from a debt crisis that the world is watching, are rated higher than India.
There are five criteria that S&P uses for sovereign ratings: institutional effectiveness and political risks; economic structure and growth prospects; external liquidity and international investment position; fiscal performance and flexibility; and monetary flexibility.
On all parameters, India scores well. India has higher growth and lower debt as a percentage of gross domestic product (GDP), lower fiscal deficit as a percentage of GDP and higher foreign reserves than almost any country ranked in our BBB- category or the one above it. Our fiscal deficit is getting worse and the finance minister has said it’s his top concern to rein it in. But with the fiscal deficit at 5.1% of GDP, we are still miles ahead of most other countries. Britain and PIGS (Portugal, Ireland, Greece and Spain) have a higher fiscal deficit as a percentage of GDP than India. In fact, according to an Economist chart, India falls in the middle range of European countries, nearly all of which have a higher rating than India.
India has something that they all lack though—the elixir of growth. India is one of the fastest growing economies in the world. And growth, as Europe, Japan and America will all say, is the best solution to relieving debt.
The numbers don’t lie, yes India is performing worse than before, but it’s still performing better than most other countries and certainly better than many ranked ahead of it. There is one non-economic number in the S&P calculation and that is political risk, which was cited as another reason for being placed on the watch list.
India’s democracy is a pillar of stability. If you want to read what’s going wrong with the country, you can peruse more than 20-odd English newspapers. If English isn’t your cup of tea, there are hundreds more in other Indian languages. And if you don’t like to read, then you can turn on the television, where there are double the number of news channels than English entertainment channels.
Does anyone believe that Peru, Italy, or Iceland are either economically or politically more stable than India? Did anyone at S&P read Michael Lewis’ Vanity Fair story on Iceland credit? We may bemoan the political situation in India, but this is a country where the glass is half full, not half empty. It is not the socialist India of the 1970s or the licence raj India of the 1980s; much needs to be done, but India’s democracy is robust. A BBB- rating makes no sense from a political perspective.
The real story is how democracy, and India in particular, is being penalized. I talked to the India head of one of the largest global private equity firms and he described how internal rate of return required for an investment in India is higher than in the US. He argued that this doesn’t make sense, and he’s right, it doesn’t.
Interestingly, Dagong, the Chinese credit agency, gives India a BBB. Dagong rates China at the top of the world with AAA. S&P rates China as AA-. Never mind that Chinese debt at the local and state level remains opaque.
The problem with dictatorships is that they seem stable until they don’t. They may be decisive but they aren’t stable. Over and over we have seen this. From the collapse of the Berlin Wall to the colour revolutions of eastern Europe to the Arab Spring, few predicted the demise of those dictatorships. Eighteen months ago, most thought Hosni Mubarak would die in office—now it looks like he may pass away in a courtroom or in jail.
S&P mentioned the political process as a reason for downgrading the US last year. The political process can be very ugly. Fighting has broken out in parliaments across the world from Taiwan to South Korea. Still, despite the potential ugliness of democracy, it is the most beautiful form of government. It allows public discourse and exposes divisions that exist in any society. It then works for a consensus to heal those divisions. If the credit ratings want to pass judgement on political discourse, then they should look at the human rights abuses that make totalitarian regimes inherently unstable.
Something is terribly wrong in adjudging the sovereign rating of nations. India’s credit rating deserves to be higher. On both political and economic parameters, India rates highly. Yes, there are problems, but we know about them. That makes it easier to assess the risk. That shouldn’t be penalized, it should be rewarded.
Prashant Agrawal, a principal at a management consultancy, writes on public policy issues in India and internationally. Comments are welcome at summaryjudgement
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