The Congress, the BJP, the media and the corporates went berserk after global rating agency, Standard and Poor’s, threatened to downgrade India’s sovereign credit rating to speculative and put India at the risk of losing its investment grade rating. The credit agency pointed fingers at the Congress President and “unelected” Prime Minister, Manmohan Singh as the reasons for pushing the investment mood in the country to an abyss and blamed the duo for the economic impasse. The agency also warned that India may become the first of the BRIC countries to lose its investment grade ratings.
“The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy. Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected Prime Minister, Manmohan Singh, who lacks a political base of his own,” reads the S&P report. These observations were based more on political uncertainty than on economic realities and raises suspicion on the motive behind these threats.
Soon after the report was released it created furore in the markets that went tumbling down and TV news were full of economists lambasting the policy paralysis that haunts the government. The term policy paralysis has been used quite often in the past by multinationals after India failed to pass FDI in various sectors. Without weighing in the pros and cons of the FDI policy, the industry experts have been severely critical of the government of not allowing passage of these reforms. “These multinational want to exploit our natural resources and want clearances of several projects that would wreak havoc on the environment and displace millions of people,” says senior journalist Praful Bidwai.
Meanwhile, government and its ministers rubbished the report and Finance Minister, Pranab Mukherjee assured citizens that the economy would soon bounce back. Several others criticised S&P’s threats and recalled how credit rating agencies were on the verge of being prosecuted by the US Congress for certifying financial and business institutions preceding the 2008 economic crisis.
But, what is interesting in S&P’s recent threats has been its analysis of the political situation and combining it with the economic volatility prevailing in the country. Their decision to target Manmohan Singh and Sonia Gandhi is full of flaws as it was the same leadership that were at the helm of affairs when the economy was going great guns. The agency also fails to analyse the economic crisis in context to the ongoing Eurozone crisis and slowing of growth across countries. Interestingly, S&P has given higher ratings to some of the European countries that are in a greater economic mess and in need of bailouts.
Many economists have argued that credit ratings have many problems, and should not be used for regulatory policy. A paper published by Jens Hilscher (Brandeis University International Business School) and Mungo Wilson (Saïd Business School, University of Oxford) revealed that credit ratings do not contain much information about actual default probabilities and that the informational value of credit ratings is surprisingly low.
Other economists believe that western governments and investment agencies have been pushing for reforms in various sectors including pension, aviation, insurance, retail and the failure to see these sectors opening up have seen them using these credit agencies to push these reforms.
There is no doubt that the country is going through a tough economic phase and certain reforms are necessary to propel the economy, but carrying them out at the insistence of such agencies is debatable. Economists believe that a great deal of caution is needed before a go ahead is given to these reforms and the government should not act in haste to please these rating agencies that have hidden agendas.