Ashoak Upadhyay

Of rating agencies and ‘fallen angels'

ASHOAK UPADHYAY | Updated on November 15, 2017

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S&P warns India of becoming a “fallen angel”. But with its dubious record in the financial meltdown who is it terming as “fallen angel”?

It had to come and it has, with all the pompous gravitas of a sentence delivered from on high, by what can only be described as the Hanging Judge.

On Monday, Standard & Poor's (S&P) berated all the BRICs members, but reserved the severest sentence for India, maintaining its ‘negative outlook' – in which nether region a country, just the other day hurrahed for its performance, stands to become a relative outcast. A fallen angel.

The credit rating agency's ‘indictment' and “warning” is not based on any deep analysis of national economies. In fact, rating agencies adopt pretty banal and shallow criteria, a handful of neo-classical economics neologisms to pass judgment on country-performances. GDP growth, government finances, capacity for reforms and economic success measured by free market, minimalist-government policies: India has defaulted on all of these criteria. Growth slipping, government dithering on reforms such as FDI in retail trade, fiscal deficit ballooning... As worshippers of the accomplished fact, the rating agencies certainly do very little to enlighten us on a country's fundamental problems, its capacity for spreading prosperity and welfare.

Who is worried?

But one would not take issue with rating agencies for being banal and superficial, were it not for the perceptions ratings generate about a country's global standing.

Most Indians wouldn't care a fig what Moody's thought of the country's ability to raise funds in global markets. Policymakers also should not care: the Obama administration simply ignored its downgrade by S&P.

Indian policymakers, however, do because as an emerging economy, its self-esteem, at least the one manufactured by New Delhi, depends on what the world thinks of us, especially the world viewed through the funicular vision of rating agencies. It is understandable for policymakers to have cared for the World Bank's or the IMF's views about us. They, after all, lend us money when we need it and cheaply. But the rating agencies simply hand down their judgments and move on to the next brief.

The shadow judges

Like all shallow judgments based on superficial readings of the case, the rating agencies often get it wrong. But their verdicts matter. And they matter not just for emerging economies eager to gain access to global capital, but to the latter too.

Rating agencies have played with increasing ferocity and self-assurance the role of shadow governments, a sort of transnational supra-regulator whose verdicts signal the transmission of capital from one region to another.

That is the paradox of financial capitalism's architecture: Increasingly stripped of supervision and oversight by national governments, it has appointed its own cross-national regulators and there are just three of them. If an emerging economy, starved of funds, wants access to the rich man's club, it has to pass before the beady eyes of those “judges.”

Why bother with banality?

Once again, the banality of a “judiciary” that worships success and flogs failures by rules, which are part of financial capitalism's discourse, could be dismissed by national governments capable of managing their own funds: Take China, for instance. As usual, India stands in between helpless submission by countries such as Spain and dismissive indifference. One could also, depending on one's economic ideology, find virtue in such super-regulation, untainted by the muck of national prejudice or parochial “nationalistic” interests.

Which country would like to own up that its governments squandered away national resources or cooked national accounts? In part, Greece landed in a soup because its governments did just that to please Wall Street bankers and blindside the IMF.

The angels as devils

The problem is that as supra-regulators the rating agencies have been accessories to the frauds of the sub-prime mortgages that led to the eventual meltdown of 2008.

Rating agencies, some of the very ones that now determine the fates of so many countries teetering on the edge of disaster, were facilitating the creation of a systemically flawed financial architecture, whose consequences are still being wreaked upon the world.

This is what the Financial Crisis Inquiry Commission set up by the US administration in 2009 found: “The three rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly.” All this on account of the “absence of meaningful public oversight.”

With that dubious record behind them, the rating agencies continue to bless or indict economies and play the shadow regulator for financial capital. Just how powerful their verdicts can be was shown when Indian stock markets closed “in the red” following the news of the downgrade.

Yet, one cannot deny that S&P does pose the right but belated challenge: “How India's government reacts to potentially slower growth and greater vulnerability to economic shocks…” However, it is a problematic whose outcomes are far more profound than S&P's warning that India could “become the first ‘fallen angel' among BRIC nations.”

India's government has already displayed its inability to meet “economic shocks.” For the best part of its new term that coincided with the global downturn and the organised economy's dissipation, the UPA government has had to simply rely on the Reserve Bank of India to keep up the illusion of its capacity to work under fire.

Given the outcomes of its indecisiveness and often futile actions — the various export “sops” and inter-ministerial wrangling over SEZ land use rules come to mind — S&P's “fallen angel” status should not bother policymakers all that much.

What should bother them is the distinct possibility, even if global oil prices soften and Mother Nature showers us with her bounty, that the organised economy, a thin sliver of the national economy, may be buckling under the weight of “globalised” India's outsized ego.

Published on June 12, 2012

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