The
recent downgrade of India as a sovereign borrower by
the US-based Fitch has come close on the heels of similar
downgrades and placing on "negative watch" by the other
big two international credit rating agencies. In April,
Standard and Poor’s had lowered India's rating outlook
from "stable" to "negative", and June it warned that
India become the first "fallen angel" among the BRICS
nations to get a sovereign credit rating below investment
grade.
These moves have created hysteria in much of the media
and near panic in official circles. The domestic financial
press, being more susceptible to external perceptions
than internal forces, is treating this as spelling doom
for the Great Indian Growth Story. Some official spokespersons
have tied themselves into knots by apparently agreeing
with the substance of the analysis of these agencies,
while disagreeing with the conclusions.
Others, including the Finance Minister himself, have
tried to put a brave face on the matter, saying that
these agencies have based their actions on "older data"
which are no longer the correct indicators. Even so,
Pranab Mukherjee declared that the government has "taken
note" of the concerns raised by Fitch and others, and
would take further "appropriate measures", in addition
to those has said have already been taken (which include
dubious policies like the fertiliser subsidy reform
and capping subsidies as a per cent of GDP).
In fact, the likely domestic policy reactions to these
downgrades are of much greater concern than actual analysis
and prediction of these agencies, which are problematic
at best. The international credit rating agencies have
not exactly covered themselves with glory in the past
few years, and in many countries there have been calls
to regulate them and look for some ways to ensure greater
accountability for the enormous power that they have
to influence markets.
Throughout the global boom, and particularly in the
US and some European countries, these rating agencies
were consistently behind the curve, failing to point
out what were really obvious problems and weaknesses
in many of the institutions (public and private) to
whom they gave Triple A investment status. The conflicts
of interest involved in such behaviour are clear, but
there has been no serious attempt at controlling them.
Nor is there any accountability or responsibility for
their actions. When it became clear in the United States,
for example, that much of their analysis and rating
was plain wrong and downright misleading, and had led
retail investors and pensions funds into putting their
investments into completely risky and sometimes even
fraudulent financial assets, these agencies blandly
declared that they could not be held responsible since
they were only offering "opinions". The fact that these
"opinions" have huge influence on markets, also because
in many countries certain types of investors like pension
funds are forbidden from taking on any assets below
investment grade, is apparently not their problem: they
are just in the business of offering advice based on
their own opinions.
There is more than irresponsibility at stake here. It
has also become clear that these agencies behave in
ways that not only affect their own business interests
but are sometimes blatantly political, pushing for policies
that would benefit finance and sometimes even in a politically
partisan manner. It is no secret that the downgrade
of US sovereign debt (which incidentally had the opposite
effect of making it even more attractive in the financial
markets!) just before the US Congress had a vote on
allowing the fiscal deficit level to rise was designed
to play into the hands of Republican opponents of the
government.
In emerging markets, these credit rating agencies have
played even more dangerous games, pushing for more financial
liberalisation that is directly in their own interests,
threatening downgrades if certain policies are not undertaken
– all in the name of objective analysis to provide their
"opinions". Yet a systematic study of these opinions
would probably reveal how wrong they have been in so
many instances, or how late they tend to be to come
up with changes in their ratings, very much following
the curve of market cycles rather than providing any
useful projections for the future.
This is also the case for their analysis of the Indian
economy, which appears to be either a bit slow to realise
some basic facts, or heavily influenced by the desire
to push for policies in the interest of global finance
rather than the Indian economy. For example, Standard
and Poor’s based its recent assessment on the fact that
the division of roles between a "politically powerful"
Sonia Gandhi and "an appointed" Prime Minister
had weakened the framework for making economic policy.
But this supposedly destructive division has been in
place since 2004, throughout the period of boom which
the same agency has celebrated with its many earlier
positive assessments.
Similarly, Fitch has cited "corruption" as a concern
and a reason for the downgrade. But surely this is not
something that has suddenly happened this year in India?
Was there no such corruption two years ago, when Fitch
was so bullish about India’s prospects, especially compared
to the rest of the world economy? If anything, more
of the earlier scams in India are now being exposed,
which makes current ones at least slightly less likely.
Fitch has also cited lack of "reforms" and gone on to
argue that "India’s medium to long-term growth
potential will gradually deteriorate if further structural
reforms are not hastened." This is an open push
for reforms to benefit large corporate capital in finance
and elsewhere, which is not at all the same thing as
policy changes that will put the Indian economy on a
sustainable and employment-generating growth path.
Indeed, that may be the crux of the problem. It is certainly
true that the recent Indian success has been based in
large part on the favourable perceptions of global capital,
which generated capital inflows. But these inflows have
not really been of the kind that generates more productive
capacity and work along with access to new technologies
and markets. Rather, financial inflows have dominated,
and have contributed to a boom driven by consumer credit
(including for real estate) and debt-driven high spending
by corporations, generating growing current deficits
in the process.
This is not a sustainable trajectory, nor has it provided
better employment and living conditions for the bulk
of the population. To ensure more stable and inclusive
growth, the Indian economy needs to get on to a different
path based on generating more productive employment
that provides basic needs to all the population. This
is not likely or even possible given the incentives
created by the past pattern of capital inflows. If anything,
such incentives actually militate against such a desirable
change in strategy.
Thus, one of the adverse fallouts of this process has
been the obsession with the GDP growth rate, regardless
of the content of that growth. GDP can grow even when
the "real economy: stagnates, if there is a boom in
asset markets that generates real estate and construction
activity and inflates financial sector GDP. But unfortunately,
this obsession with growth has not just been within
finance, but has also permeated industrialists, who
should rather be concerned with their absolute profits
and the size of their markets. And it has contaminated
policy makers as well, as they focus single-mindedly
on the quarterly GDP growth figures without looking
at the composition of that growth and whether it is
translating into higher employment and better material
conditions for the bulk of the population.
In this context, it is evident that if the credit rating
agencies had actually continued to be bullish on India,
we would be getting further into the creation of an
unsustainable bubble, the inevitable bursting of which
would be even more painful. What is the point of getting
lots of speculative inflows of hot money that do not
translate into productive investment that creates employment?
Why encourage the continuation of macroeconomic imbalances
that are fundamentally undesirable?
So why should we bother about the "opinions" of these
external credit rating agencies? Maybe we would all
have been better off without the destabilising influence
they have played and continue to play in India and in
the rest of the world.
*
This article was originally published in the Frontline
Volume 29 - Issue 13 : Jun.
30-Jul. 13, 2012.
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