23 Sep 2016 20:04 IST

Why Moody’s blues got the government’s goat

It cited weak private investment, bad debts in the banking sector as the Indian economy’s pressure points

The government has got into an unseemly row with rating agency Moody’s. It all started on Tuesday when Moody’s, along with ICRA, held a press conference in the Capital where it said it was adopting a ‘watch and wait’ approach towards India’s sovereign ratings.

Though Moody’s was encouraged by the government’s recent reform measures such as the passing of the GST Bill in Parliament, the Bankruptcy Code and fiscal consolidation, it said it will wait for one or two years, and for more ‘tangible’ reforms to be in place before upgrading India’s ratings.

It specifically cited weak private investment and bad debts in the banking sector as pressure points for the Indian economy, while wanting to see more action on the Land Acquisition Bill, labour reform, infrastructure investment and public sector bank reforms. Moody’s came out with this assessment just a day before its meeting with Finance Ministry officials.

Now, if one were to ignore the politics behind why the government should accord so much importance to Moody’s assessment (that would be material for another column), the government’s reaction was prompt and swift.

Ratings and their importance

Rating agencies over the years have gained a great deal of importance and their sovereign ratings are taken very seriously by governments and multilateral agencies such as the World Bank and IMF.

Interestingly, the mauling that rating agencies received in the aftermath of the 2008 global financial meltdown — when they were accused of failing to detect toxic financial products hawked by banks that brought the global financial system to its knees — hardly seems to have dented their image and credibility.

The Indian government lobbying with the rating agencies and showcasing its performance — according them the status of ‘supranational’ arbiters of India’s economic performance — started during the UPA regime and has continued since then.

Which is why the government’s outburst against Moody’s makes interesting reading.

Marked changes?

So does this mark a change in direction in the government’s dealings with rating agencies? Not really, as the government is hardly in a position to do so. While it has been careful in not questioning Moody’s locus standi, its differences with the rating agency are only on specific points of its assessment.

The government’s first peeve was Moodys’ meeting with the press before its meeting with Finance Ministry officials. Shaktikanta Das, Secretary, Economic Affairs, said, “I thought the due process has to be followed and you cannot jump the gun.” He also had some unusually sharp words for the rating agency when he said, “We expressed our serious concern about the methodology.” Das also said that Moody’s did not give sufficient consideration to the “depth” and “pace” of reforms in India.

He further added, “You cannot say that I will give zero weightage and I will wait till infinity to see these reforms take root… It should not be a kind of bottomless pit.”

Though the final word on this row has not been said, the Moody’s assessment seemed to have touched a raw nerve in the government. And the agency did point towards some of the crucial weak links in the economy. The BJP-led NDA came to power promising ‘Acche Din’ and a quick turn around of the economy, overturning UPA’s ‘policy paralysis’.

Slow and faltering change

But the progress, after more than two years in power, has been slow and faltering. Weak private investments is certainly an area of concern and unless India Inc rouses its ‘animal spirits’ again, things on the ground are not going to change rapidly.

And this has put the government in a bind, as without a pick-up in private investments, its flagship programmes such as ‘Make in India’ and ‘Start-up India’ will remain non-starters.

The recent Index of Industrial Production data (2.4 per cent contraction in July) makes dismal reading and what’s more worrying is the slump in the capital goods sector (a hefty 29 per cent contraction), which is seen as an indicator of capital formation in the economy. Inflation is one area where the government can claim some victory and its softening trend opens the door for a rate cut by the RBI.

Rate cuts

But even here, the government seems to have shot itself in the foot, as economist Pulapre Balakrishnan says in a recent article. The RBI’s exclusive focus on inflation control has led to giving up its role in output growth, he says. Even if the RBI obliges with a rate cut, it is doubtful that the banks will transmit this cut, given the serious bad debt problem they are grappling with. Besides, it’s naïve to expect private investments to revive by a mere rate cut.

Also, Balakrishnan argues, as the government has committed itself to fiscal consolidation, the scope for using fiscal policy to rev up the economy also seems limited. So it will be interesting to see how the Finance Ministry deals with this situation.

Though the government can still claim that India is one of the best economic performers globally, Raghuram Rajan’s words of India being a ‘one-eyed jack’ must be ringing in its ears.

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