India’s rating is BBB-, which is the lowest possible investment grade. India got the rating five years ago, the poorest nation in the world ever to get an investment grade rating. In comparison, China’s is AA-, while Pakistan’s is B-, which places it in the junk bonds category.
The rating is based on economic and financial data. However, an element of analysis is included. To see how subjective this analysis can be, consider what S&P’s Joydeep Mukherji said while explaining why the firm had cut the US’s rating. This had been done, he said, because of Republican scepticism last year (during budget negotiations) that a US debt default would be particularly damaging. “This kind of rhetoric is not common among AAA sovereigns,” said Mukherji, who is incidentally also one of the two authors of the India report.
He says S&P will not downgrade India if the following happens: “modest steps” in cutting growth in spending, GDP growth of seven per cent or more, “modest progress” in reducing the fiscal deficit and “some” reforms and administrative measures.
S&P will downgrade India if the following happens: growth in spending and “lower-than-projected” GDP growth, increasing the fiscal deficit.
So far so good and this sounds reasonable. A higher fiscal deficit crowds out the private sector (because the government is also borrowing heavily) making access to capital expensive and that’s bad for business. S&P then offers a political analysis for the reasons why things are bad, and here the report begins to slip. The analysis is under the headline: “Divided leadership at the centre may be the biggest hurdle”.
S&P explains how Sonia Gandhi is the real political force and Manmohan Singh is an appointed prime minister. This division “has weakened the framework for making policy” and “has likely contributed to poor discipline and cohesion”. The problem is that there is no alternative. Real power will always remain with Sonia Gandhi because Congress is a dynastic party. But she’s not qualified to become prime minister. She’s never been to college and her main educational qualification, according to her Lok Sabha resume, is passing out of high school. S&P ought to have given an example of something that divides Manmohan and Sonia along policy, but cannot because Manmohan and Sonia have an excellent relationship. One that, in my opinion, works. She trusts him to think up high policy and execute it while she tries, sometimes failing, to give him the power to push things through.
Sonia as prime minister making policy decisions on her own, or her stepping aside to let a Congressman take full charge are both unworkable.
The critical issue is whether Manmohan believes that social spending is economically beneficial. He very strongly believes it is. I think he would have stepped down if he did not agree with the enormous spending on NREGA, the scheme guaranteeing minimum employment to all families, or Right to Education.
He has said in an interview that the major reforms have already been legislated. I think he’s right. The key to sustained growth cannot be the passing of vestigial reforms like more foreign investment in retail. An economy whose base is a very low $1,500 per capita must have an internal dynamic to grow in sustained fashion. A healthy population that has access to quality education is critical. Neither is available to India today, with more malnourished, illiterate and half-literate people than any other nation.
Manmohan is right to try and thread the needle between high social spending and a fiscal deficit on the cusp of manageability. His hope, and it can be no more than that, is that this spending produces the nourishment to make the seeds sprout. The S&P report’s analysis, prescriptions and its threats must be put in perspective in this light.
Published In The Express Tribune, June 17th, 2012.
COMMENTS (12)
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Thanks for explaining the S&P rating system and how it works.
S&P ratings is based on numbers and its own subjective perspective , which can be many times driven by its narrow interests. Indian Govt has rightly given clarification on the statements from S&P to lower ratings. S&P it seems is being used by interested parties to put pressure on Indian Govt to ease FDI in retail sector, waive off IT demand on Vodafone ( Vodafone hasnt any tax to British exchequer, so wants India to follow) etc. Such arm twisting tactics may work for banana republics, but surely India can ward off such threats from a rating agency ( which is in hands of some vested interest). Time to stand -up and ask S&P to either learn to live with India's policies or take action which suits them.
S&P rating system is not applicable to India. Investments to India capital market is driven by domestic economy, and the demand for domestic economy is very high. Domestic tax collection rates and spending are policy decisions and it will change as it has been over night without the major debates and political issues affecting other countries. Unlike other developing countries India has plenty of domestic capital for its economy.
A running economy is better than a stagnant economy and that is where the difference comes in.
India will succeed needlessly without our comments
But what has NAREGA to show for all the expenditure that is incurred? This money could have been easily used to build infrastructure like roads/ power generation etc with the help of same people who NAREGA targets.They would have also felt they earned it and country at large would have benefited. But what has govt to show for it except few ditches? The workers do not work for three months a year for they know they are going to get money anyway. This is also one of the reasons Industrial production has gone down. These kind of social welfare schemes can work where there is command and control economy,where you can make people work, not in Indian economy which is an out and out capitalist economy
Jethmalani is taking right step to come in race of PRez, to show sonia dynasty who gave chocolate to PRanab
Good article. It is better to be a economist turned politician than politician turned economist. This is the best type: Sonia looks after party and MMS looks after the govt. Both, in NREGA and RTE India has embarked on an experiment for the first time in the history of man. It has to succeed in these for the betterment of mankind. Both Sonia and MMS have not failed. Remember it is "high school girl" Sonia Gandhi who brought RTI. Because of RTI all the present scams are being unearthed.
Thank you, Mr Patel. You are on the ball. Dr Singh is one of the world's most eminent economist, as well as a political leader, but not too many other from his first profession would be by his side on this matter (perhaps Stiglitz and Sen and a few more). But you make a critical point. What is more important, FDI or human development. Take it from me, if you will, a country will not lose if it bets on its citizens over foreign investors. And what better way to say it than the way you do so. I am concerned because Pakistan is on the wrong track with economic policy makers advocating a 'growth strategy' at the expense of the disadvantaged. It is no policy at all.
Sonia Gandhi rules the party even though she has no high educational qualifications or political experience because she controls huge financial resources. She controls various trusts which hold billions of rupees. Also she knows the secrets of all the main players which cows them down. This is why she is very powerful and is able to rule the party and India.
I enjoy reading Mr. Aakar Patel's articles. And this one gave me a new perspective in the FDI row.
Real power will always remain with Sonia Gandhi because Congress is a dynastic party. But she’s not qualified to become prime minister. She’s never been to college and her main educational qualification, according to her Lok Sabha resume, is passing out of high school. Manmohan Singh was not made PM because of his excellent academic qualifications or even his stellar showing as FM - it was because he would never be a threat to the dynasty as he was not a mass leader to begin with. Educational qualifications and leadership ability are very different; half of the great business leaders in India don't have fancy degrees - but they understand the art of the possible. MMS' failing is in charting out a clear process of sustaining growth through structural reforms, in attracting investment in critical sectors (education, health, infrastructure - budget allocation is not enough) and in maintaining the appearance of managing his motley bunch of opportunistic allies and Nehru-Gandhi sycophants to convey the semblance of coherence in decision making.