A timely re-rating

Global credit rating agencies aren’t known for extraordinary prescience. It was their triple-A ratings for mortgage-backed securities in the US that, after all, paved the way for the 2008 global economic meltdown. But what they say, whether accurate or otherwise, matters because many large global fund managers base their investment decisions on the guidance issued by these agencies. So much so, it is significant that Standard & Poor (S&P) has revised its outlook on India from ‘negative’ to ‘stable’ (even though it retained the country’s overall sovereign credit rating at ‘BBB-’ corresponding to the lowest investment grade). This is an improvement over April 2012, when the agency cut India’s long-term ratings outlook to ‘negative’ and even held out a one-in-three likelihood of a formal credit downgrade to ‘junk’ status. The turnaround in perception is welcome, more so as it comes during Prime Minister Narendra Modi’s maiden official visit to US, which presents an occasion to reassure investors of India’s commitment to reforms and how the environment for doing business has changed for the better.

There are two broad factors guiding the current reassessment: All three major firms — S&P, Moody’s and Fitch — have now assigned stable, lowest-investment grade rating to India. The first is political stability: compared with most other emerging markets, the present government in New Delhi is seen to enjoy a “strong mandate”, in S&P’s words, to carry out difficult but necessary economic and governance reforms. The second positive is macroeconomic stability. Until two years ago, India’s twin deficits seemed to be spinning out of control. But a slew of desperate measures helped slash the current account deficit to $32.4 billion in 2013-14, from the record $88.16 billion of the previous year. A similar consolidation appears underway on the fiscal front this year. Falling global crude prices and the policy to gradually raise domestic diesel rates have eliminated under-recoveries in this fuel, that had amounted to ₹62,837 crore in 2013-14. This, together with a likely higher-than-budgeted mop-up from disinvestment thanks to the continuing bull run in the markets, makes the fiscal targets for 2014-15 look pretty achievable. The Centre has, in fact, trimmed its original borrowing estimate by ₹8,000 crore.

However, political and macroeconomic stability are necessary ,but not sufficient conditions for a return of high growth and investment to the levels during the period from 2004 to 2011. Today, we are in a situation where most investors believe the worst is behind us. But this optimism isn’t enough to embolden them to take the next big step — of putting their money in projects to generate jobs that can set off a virtuous cycle of investment, consumption and growth. There is this element of residual uncertainty, which the Government alone can dispel, either through decisive confidence-boosting reforms or investing itself. The next few months will see how much of its talk translates into action.

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