The Hindu Business Line : Irrelevant rating?

At some point in time a rating by Standard & Poor's had all the prestige of a Wisden toasting international cricketers. Those times have gone. Any rating by S&P today has become largely irrelevant to an economy growing at around 8 per cent. Grading by S&P mattered when Indian corporates could not fancy a premium over sovereign rating, forcing them to borrow dollars dear. In November 2005, S&P Ratings Services placed Infosys and Tata Steel above sovereign India, enabling them to borrow on the strength of their balance sheets.

In its latest missive, S&P, in affirming the sovereign long-term rating at `BB+' and short-term rating at `B', does not think India worth the "investment grade" though foreign institutional and direct investors have long shed their reluctance to profit on the India story. Net capital inflows at $14.7 billion in April-December 2005 were made up of portfolio investment ($8.2 billion), direct investment ($4.7 billion), NRI deposits ($1.1 billion) and short-term credit ($1.7 billion). Excluding the India Millennium Deposit redemption, ECBs (external commercial borrowings) have been placed at $4 billion ($2.9 billion a year ago) and net capital inflows at $20.2 billion by the RBI to make the point that the S&P view does not matter for foreign investors. The economy is confident enough going by the degree of engagement with the world — merchandise and invisibles transactions taken together, instead of the conventional ratio based on merchandise trade alone, have touched a level equivalent to 45 per cent of the gross domestic product in 2004-05 from about 20 per cent in 1990-91. For long, S&P was obsessed by the nation's fiscal deficit, which has been repaired by the government putting in place the Fiscal Responsibility and Budget Management Act. Never have so many Indian corporates donned the war paint to raid the West and China for acquisitions to counter pressure on margins from domestic operations. The country can set aside free foreign advice from the World Bank/IMF and S&P as its own managers are more than adept in putting corrections in place.

Changes in the financial sector will be hard to come by while some can be seen and felt in infrastructure. For instance, the ground realities in the airlines industry are coaxing change. With private airlines taking more than half the air space and airports looking a bit like Mumbai's suburban railway stations, the Centre has been able to switch on the modernisation of Mumbai and Delhi airports. In the coming months, spiralling crude prices could be the lone critical variable with the Centre finding it hard to contain prices of petroleum products. S&P has warned it may revise its outlook back from "positive" to "stable" if reforms and fiscal prudence are not adhered to. India is not showing any signs of getting frazzled by S&P's needless needling.

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