Friday, October 24, 2014

Not yet acche din, but getting there: Financial Express 27th September 2014

The change in the India outlook of Standard & Poor's (S&P), from negative to stable, comes at the right time given we are reaching out to investors and the acche din slogan looks credible still. The Sensex has reflected the positive sentiment internally; and the change in outlook by an international credit rating agency known to be parsimonious with praise would do the same globally. The fact that the rating is still BBB�, notwithstanding the change in outlook that vindicates to some extent whatever has been done since May on the economic front, challenges us to maintain, if not better, the situation going ahead.
We have been pitching for a better rating from the rating agencies and the arguments put forward have been that the economy is looking up, the fiscal house is in order, we have established control over the exchange rate and inflation is also down to an extent. With macroeconomic stability being established and growth moving upwards, there is strong reason to change the view on economic conditions today relative to what they were last yeara time when we had probably reached the nadir.
The ratings, reviewed annually, take into account what is happening at the moment as well as future prospects. Quite evidently, S&P views things to be more positive within these time horizons. The Indian governmentboth past and presenthave repeatedly been arguing for a change in ratings on the ground that policies are in place to stabilise macroeconomic conditions and create a viable path for the future. S&P appears to be convinced, but only to an extent. It has played safe by changing the outlook but retaining the rating. The indication is that the 'bigger things' can happen in case we continue on this path.
Should a credit-rating agency's view matter for India? For the government, it really makes little difference as it does not borrow money from outside; and to the extent that debt is subscribed by FIIs, it comes in irrespective of the rating. However, from the sovereign's viewpoint, the movement of ratings is a matter of prestige. As we are in a globalised setting, such comparisons are unavoidable and while rating agencies have tended to use tinted-glasses while judging developing economies, every country nevertheless wants to be viewed positively. But this rating affects Indian companies when they borrow overseas or enter into any swap facility while borrowing in the euro-market. Here, the bank providing the swap carries less weight or higher cost if a company's home country doesn't have a good rating.
What has caused the sudden change of heart at S&P? Quite evidently, we are moving in the right direction and doing the right things. The fact that we have a strong government plays a positive part in this decision, especially as it is being associated with progressive policies for economic growth. The earlier government was viewed as a weak coalition that could not move forward with ease due to differing ideologies of allies. There also have been some policy changes on the FDI front in defence and railway equipment apart from changes in labour laws, etc, which, though not expansive, are significant.
Second, there has been an all-out campaign to woo foreign investment; this sends the signal that the government is keen on providing an enabling environment for business. Third, which is related to the second, there has been a lot of effort put to ease the processes that affect the conduct of business, evident in the clearances given to stalled projects.
Fourth, there have been improvements in various economic indicators. More importantly, the ratings agency believes that these trends will continue. Therefore, a pickup in growth, control of inflation, strengthening of balance of paymentsand, hence, increased currency stability and a pick up in infra-spending is something that would have gone into this decision.
Does this mean that the rating has changed? No. The rating remains where it was, at BBB�, which is just at the precipice of the investment-grade. The outlook has only changed which indicates that the agency is of the view that all these positives can be a reason for upgrade at a future date, provided there is continuity in policies and performance. In a way, it vindicates the government's pursuance of fiscal prudence and RBI's stance on tight monetary policy till inflation comes down.
The credit hence goes to the government and RBI for being firm on their policies, notwithstanding the detractors. In fact, RBI should be complimented for all the repair work it did on the external front where innovative measures were used to bring in dollarseasing the forex crunchand bring stability to the rupee. It is to the credit of the central bank that we have reached the stage where we are really thinking (at times) of checking the rupee appreciationsomething that has not been heard for some time now.
For a ratings upgrade, we need to move to a new level where we translate the articulation so far into concrete action so that growth takes off in the right trajectory. This is the challenge going ahead as there are concerns of the monsoon impact, inflation, imports (when growth picks up), Fed increasing rates, etc, spoiling the party.

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