The Hindu Business Line : Beyond the S&P rating

LIKE A CAPRICIOUS mother-in-law, Standard & Poor's has been whimsical in credit-rating the Indian economy. Anyway its pronouncements do not appear to bother most international players, as, otherwise, it is hard to explain the continuing rush of foreign institutional investments, despite the sticky fiscal deficit, or the easy rates at which Indian banks are raising dollar funds from foreign entities.

Of course, there have been quite a few positive developments. The Manmohan Singh Government has kept its side of the international trade bargain by adopting a new Patents Act (drug prices have not soared) and freeing textiles from export quotas. New Delhi has managed to contain the effects of the rather sharp spike in crude prices by tweaking import and excise duties and giving up on the policy pretence of freeing refinery product prices. The pardonable policy aberration is no sin as inflation has been pegged near the 5 per cent mark. Foreign investments in telecom and aviation have been relaxed, rural credit is being pushed and the commodities markets are getting the attention long hogged by the equity market. In general, regulatory controls have been loosened to let foreign direct and institutional investment flow into many more sectors of the economy. All this is no ordinary job. By 2006, when the Basel II norms click in for the banking industry, foreign investors will have to be allowed in to help banks raise additional risk capital. The Inter-Institutional Group of Banks is confident of the private sector adding 4,000 MW in the next two years with the fund cost put at between 8.50 per cent and 10.50 per cent.

Yet, for S&P, India is not good enough for the investment grade even though it says, "India's external balance-sheet has strengthened markedly due to reserves accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability." Strong growth can take care of the fiscal deficit and the Manmohan Singh Government has adopted a fiscal responsibility law to restrain splurging. Still the Indian growth story is stuck in the post-Hindu rate of 6 per cent — a long way off from the targeted 8 per cent and 10 per cent. The 6 per cent growth will not do if the nation wants to make a difference in the lives of the millions living in the drag States of Uttar Prasesh, Bihar, Madhya Pradesh and Rajasthan. An important factor behind the uneven growth is the lack of capital investment in agriculture, and the Government has done precious little about this. It gets worse as agriculture is a State subject and most are yet to reform marketing and land laws to allow private initiative.

There is no credible rural credit delivery system to ensure that funds reach the farmers even as government banks struggle to shed a mindset allergic to the farming and services sectors. Going by the 2001 Census figures, only 30 per cent of the rural Indian households availed themselves of banking services. Credit allocation of banks to metropolitan areas stood at 61.55 per cent by end 2003-04 while for the rural and semi-urban areas it was only 9.5 per cent and 11.38 per cent respectively. If this kink in the system is not quickly removed, India will not go beyond the 6 per cent mark, whatever S&P may rate.

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