The Credibility Quotient

 

The Credibility Quotient

Twenty-nine months after a downgrade to ‘negative’, despite six monthly reviews, Standard and Poor (S&P), restored its outlook on India to ‘stable’.  Being the largest of the international rating agencies, it is likely to lead to others, such as Moody and Fitch, to also revise their ratings upwards.

The Modi Government has earned this endorsement  because of its majority presence imparting stability, plus its business and economy friendly policies. Also India’s external debt is small, its foreign exchange reserves are reasonable, and  its current account deficit (CAD) is under control. The fiscal deficit is still high, with much rupee debt, and massive subsidy bills. Yet the economy is moving again, with the GDP tending towards 6% from the erstwhile low of 4.5%.

This ratings boost will, amongst other things, build confidence with regard to India as an investment destination, lower external borrowing costs, enthuse fence-sitting FDI, and occasion greater FII flows.  A negative assessment from such agencies results in very little of the trillions of dollars in international investment flows actually coming to this country, or into the reviewed stocks.

Even after this upgrade, India with a country rating of BBB-, has a ranking lower than a beleaguered Spain, which boasts  of a BBB. That Spain, near bankrupt, with poor growth and horrendous borrowings, is rated a notch higher than India, is ironic. Not only is the ‘political risk’ viewed differently for this ‘developed’ country, propped up by its membership of the EU, but its debts are  de facto underwritten by the Germans and French.  It is another matter that the EU is hanging together today so that it is not hung separately.  

India, an emerging economy (EM), has, of course, to fend for itself. It is here that Modi’s fresh initiatives to strengthen SAARC, join ASEAN and the Shanghai Group have significance. Coming closer to both China and Japan, and Australia for that matter, as we are now doing, will also help the way we are rated in future, with the politics of such ranking working in our favour. Things are not necessarily judged fairly by the US dominated World Bank, the IMF, the ADB and so forth. The new BRICS Bank under formation will also help in this regard.

The American owned S&P’s upgrade, coming on the eve of  Prime Minister Modi’s departure for the US, and coincidentally just after the launch of the Government’s lion monikered ‘Make in India’ campaign, is most welcome.

The stand-off between China and India in Ladakh has also, in the interim, been resolved diplomatically, auguring well for the Modi- Jinping concordat afresh. The Indian media, near hysterical over the intrusions, can perhaps start to regard the recent warm interaction with China at its highest level, as a brand new start to mutual cooperation after all.

It remains to be seen what the harvest brings in from the prime minister’s high octane visit to America. Mainstream America has taken little notice of Narendra Modi, and is unlikely to do so, until he actually meets President Obama this week. From the inter-governmental interaction some investment decisions in the defence production area could emerge if the IPR fears of the Americans are addressed. Other items, including ISIS and ISIL, Afghanistan, Pakistan, the WTO, India’s UNSC seat, operationalising of Nuclear Power matters, a possible beginning in Thorium based development, will probably be all in the discussion,  but with little for the public to take away.

But the interactions with the powerful CEOs of America, politicians on both sides of the aisle who may succeed President Obama, now on the cusp of his lame-duck period, and the greats of the  mutual fund  industry etc. are likely to have far reaching and favourable consequences.

What these good things are however may not become immediately visible, and are much dependent on what the Modi Government proceeds to do to cut red tape, taxes, reform labour and other laws, and so on. Modi knows this full well, and is making bold and clear cut promises, following through on his ‘Look East, Link West’ policy.

There are challenges and opportunities for political consolidation in the forthcoming Maharashtra and Haryana assembly elections for the BJP.  In the dramatic developments on coal block allocations returning much better yields to the Government shortly. And in the substantial blow against corruption in public life bracketed in the conviction of  Ms. J.Jayalalithaa, erstwhile sitting Chief Minister of Tamil Nadu.

But to really put movement into his ‘Come-make in India’ clarion call, and to see the billions in foreign investment pour in, the credibility quotient on the ground when NaMo returns home, will have to be raised sharply, quickly, and across the board.  

(776 words)

September 28^th, 2014
Gautam Mukherjee