The Hindu Business Line : The rating gets better

After tracking the country's consistently good economic performance over three years, the international credit rating agency, Standard and Poor's has followed its peers in upping India's credit rating to investment grade from a speculative one. Moody's rewarded India with investment grade in 2004, followed by Fitch in 2006. The reasons for these upgrades lie in the country's excellent economic prospects and a stable outlook on foreign debt amidst a weak but improving fiscal debt regime.

Presumably, such kudos from international credit rating watchdogs will provide an extra measure of comfort for investors from around the world. Judging by the explanation for S&P's upgrade and its timing, late into one of the fastest growths witnessed in decades, one could be forgiven for assuming its upgrade is more an endorsement of past performance than a benchmark for growth prospects. International credit rating agencies such as S&P's are supposed to provide investors around the world with independent yardsticks to evaluate countries with perceived risks. But the history of capital flows to developing and transition economies suggests that more than the agencies' stamps of approval, it is the level of confidence the local governments and businesses inspire that is critical. The US, for instance, has a huge fiscal deficit run up by the present administration but that does not reduce the confidence of global investors in US debt markets. India's dream run since 2002 has much more to do with the sense of policy determination, and with clear-headed businessmen exploiting opportunities than the `speculative' rating grade would suggest.

A more substantive shortcoming of agencies such as S&P's than the fact that the prognosis comes so late, is the glossing over of the one factor that could put paid to growth, even in the medium term. Inflation has moved up two percentage points over the last twelve months and threatens to rise even further on the back of the scarcity of essential articles. Despite both the Reserve Bank of India and the Finance Ministry recognising the dangers of unchecked inflation, it is surprising that S&P's paid little attention to this threat, focussing instead on the weak but improving fiscal health of the government. India may have become a high growth centre despite high public debt; it may continue to remain so if the burden of the public debt does not crowd out private investments. But the economy will decelerate if unchecked inflation undermines public incomes.

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