Whose Rating Is It Anyway


The Pied Piper of 7 Race Course Road is playing his tune, and the foreign rating agencies are all coming out to dance to his tunes



Journalist with more than 15 years of experience. He has worked as a Special Correspondent in The Sunday Indian and as Assistant Editor in NewsBench

Managing perception and manufacturing a propaganda—the difference is just hairline. People in power have been using it for their convenience for long to suit their interests. Of course, they need tools to carry out the process. In modern financial world, credit rating agencies are one such tool. It has often been used in the political and business life to further and agenda or reflect that everything is alright, when in reality, ground situation is as sluggish as ever, traffic of economy is still stuck in the red light.

This was in brazen display when Moody’s upgraded India’s sovereign credit rating to Baa3 to Baa2—which is from stable to positive. This came as a booster shot to the Modi government—which has nothing to show tangible on the platter—after completing three years of government. No wonder they went gung ho about it. But situation on the ground still remain in a shambles.

By the time you’re reading this story, other two prominent rating agencies –Standard & Poors and Fitch have come out with their projections, and they have not changed it. So, out of three judge bench, two have decided to go against this government. Why this is all meaningless because India’s fiscal deficit during April-August touched 96.1 per cent of the budget estimate for the full fiscal year of March 2018. It has already touched 96 percent of the whole year target in just seven months.

This shows that fiscal situation on the ground is in the doldrums. This is an important indicator of the health of an economy. Crossing fiscal deficit target means mayhem in the market with rupee tumbling compared to dollar affecting our exports.

Amazing Timing

The timing of such boosters is what is perplexing. They are coming one after other. First came India’s progress on the Ease of Doing Business front which pushed it 30 positions up in the ranking, then comes the Pew’s opinion of Modi which declared that he has still 90% approval rating, after that International Monetary Fund (IMF) chief Christine Lagarde certifies that Indian economy is in good shape and at last Moody’s sovereign upgrade which gives credit to ‘earth-shattering’ work of Modi government. All of this came just before the Gujarat election to tell the populace that everything is alright. However, if you make a visit to Surat textile mandi, you’ll really laugh on these claims.

Even on Moody’s front, nothing earth-shattering has happened. It has just moved from almost junk grade to investment grade. It still put India among countries with moderate credit risk. And why it took India 13 years to move only one notch? And what ‘amazing’ things this government has done in the last three years that forced Moody to change its outlook towards India. Has government of India tried to influence the agency?

That’s not entirely wrong. Last year, when Moody had not upgraded India’s status, the government was seething in anger and had criticized the agency for not taking cognizance of the good work done by the government. Numerous news reports surfaced about government apparent lobbying for rating upgrade and failing in its effort.

Modi government has always attempted to impress people at home with foreign accolades. It helps to hide mismanagement. Economic growth fell to 5.7 in Quarter1 2017-18 owing to the twin onslaught of GST and demonetisation, current account deficit is high with hardening of oil prices, weak investment demand, poor job growth rate, decreasing private investment and contraction of the output of public goods. Even Finance Minister Jaitley was forced to acknowledge the deteriorating state of the economy and had to take steps to revive economy. Modi had to revive the Prime Minister’s Economic Advisory Council that had been made defunct since he took charge as prime minister.

So has Prime Minister Modi’s pressure forced Moody’s to consider India for a sovereign rating upgrade? Modi’s doggedly made concerted effort and harsh criticism on his assessment and even delegitimizing might have worked in India’s favour. Finance ministry has questioned Moody’s methodology, while explaining that it has failed to take cognizance of the fact that it has indeed ignored the several key development indicators when assessing the fiscal strength of the country. Modi just not remained to words, he warned to back his words by action—which finally resulted in the downgrade. Though, the methodology of these rating agencies have always been flawed and biased towards developing countries, and there are enough questions on their credibility in the past. Next come to this story again. For the last two years, Modi had been trying to convince BRICS countries to create form their own rating agency which can rate emerging agencies more fairly. But it did not made any headway. China need not have obliged India anyway; first on the diplomatic front, Modi’s typical substance-less bravado of “putting China in the right place” starting with his swearing in, where the Chinese delegation was treated as just short of pariah; and Chinese diplomats could have been wiping their smiles off their sleeves: Didn’t Modi know China already had its own rating agency, China Chenxing, a Hong Kong-based rating agency formed in 2010!

Things started changing when Moody’s downgraded China’s sovereign rating last year. Chinese finance ministry criticized the rating on the basis of inappropriate methodology. Even country such as Russia, Brazil and South Africa voiced similar concerns over the fairness of these agencies. Moody’s soon figured out that with China throwing weight behind Modi to the idea if BRICS ratings agency may create a potential rival in this unchallenged sphere.

In principal, BRICS nations have agreed to the idea of their own rating agency. New Development Bank President K.V. Kamath said, “Methodologies of the three global agencies is flawed and it needs to change.”

Dubious Institutions

These credit rating agencies are in existence for more than 100 years, but they gain power and clout after 1975 with the active backing from the US government. Now they are influential actors in the world of finance and serve the vested interests of the western world. US government framed such rules that accentuated their monopoly position such as pension funds in the country could invest only on the basis of the rating of these agencies. Thus, they are an approved authority of the US government to assess the creditworthiness of companies and countries.

They matter for countries because based on the rating, borrowing rates are decided in the overseas market. Though India has moved one notch above in the same investment grade based on the consistent increase in the foreign direct investment flows into India from $2.4 to $43.5 billion from 2001-02 to 2016–17.

So will it push the inflow of dollar in the country? This is highly unlikely as that would mean undue pressure on the price of rupee leading to unhealthy consequences for the whole economy. Anand Teltumbde, a writer and civil rights activist with the Committee for Protection of Democratic Rights, Mumbai, correctly writes, “They were blamed for the financial crisis of 2007–08, which exposed how the underwriters “shopped” for ratings for mortgage-backed securities and “collateralized debt obligations” among vying rating providers (Coffee 2011). The Financial Crisis Inquiry Commission (2011) noted that of all the mortgage-backed securities it had rated triple A in 2”

In the report by Matt Taibbi’s in 2013, titled “The Last Mystery of the Financial Crisis,” clearly exposed the crony nexus of banks and these rating agencies that were ready to pay cash to these agencies in order to get favourable rating. No wonder Enron and WorldCom failed in 2001 and 2002 when they were rated AAA by the agencies. And Moody’s chairman Clifford Alexander Jr was serving on the board of WorldCom. Their role in financial crisis of 2008-09 is well known. All of this is important to know who consider them as ultimate approval authorities and accredit them of the ‘demi-God’ institutions of credibility.

Going Gung-Ho, Wait!

Upgrade is not a bad news in itself. But it warrants a cautious approach and Modi Bhakts should not start jumping with joy. And ratings were not bad in the past either. India had a rating of A-2 from January 28 to October 1990. It later worsened with the payment crisis in 1991. Rating upgrade does not also mean it cannot go down further.

If government fails to perform well on the fiscal front, the ratings can be downgraded. The rating upgrade has been mainly because successive governments have tamed fiscal deficit in the last decade. The combined deficit of states and centre has not gone out of control. So, the challenges to tread on the path of fiscal consolidation and management will always be on the government. “A material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating, the rating could also face downward pressure if the health of the banking system deteriorated significantly” says Moody’s in its statement while releasing the report. India ranks on 175/223 on Infant Mortality Index, 100/119 on Global Hunger Index and poor 145/197 on education index. And these matter more than Moody. But will Modi Mind it..There is doubt considering his poor

track record on all social indicators in Gujarat.


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