INDIA’S CREDIT RATING (This article appears in today’s Deccan Chronicle/Asian Age) (you can see it at There is a debate on about credit rating agencies and their actions or pronouncements on India. Naturally, we get emotional about it and think that as a nation we will never default. History is witness that we have defaulted at least twice post Independence. And many people take irrelevant numbers and compare India with other nations and feel strongly that we are better than so and so country that has a higher rating etc., To put it in perspective, Indian economy has always been short of being an investment grade on a standalone basis. Yes, we can get a higher credit rating, if we stop importing oil. We must stop importing oil and everything else must be the same. Our exports, our software earnings, our NRI remittances etc., Frankly, I think this is not possible. If we stop importing oil, one can imagine the ripple effect. The auto industry would be a fraction of what it is today. We can only have an auto industry that can be supported by the domestic oil produce. Maybe if all Indians pledge to stop buying gold, it could improve the country’s credit rating. It has to be voluntary and not a forced one. Every import (other than perhaps the nefarious thing called precious gems and jewellery or gold) has a contribution to our growth. So, if we do stop importing something, there would be a ripple effect somewhere. If we can control our appetite, surely we can get a better credit rating. However, controlling one’s appetite is blasphemous! How dare I suggest that Indians stop buying gold? How can I tell them to stop driving cars? It is simply not done. So, structurally, we have a receipt and payment account, where our payments in foreign currency exceed our receipts in foreign currency (our trade deficit) by nearly a billion dollars every day! For a full year, we have a dollar shortfall of 300 billion! We are a fortunate nation. Indians, who have left for better pastures overseas, send in close to five billion dollars every year. So, we take care of some of our hunger for dollars through the dollars they send us. For the balance, we have a serious problem. We can either borrow or make the foreigners send in money in dollars to invest either in industry or our stock markets. Unfortunately, we do not permit them to invest freely everywhere. For example we do not let them invest in agriculture. The fear is that if they bring in better techniques, the local farmer (who is subsidised every which way) will cease to exist. We do not let them buy land for fear that they will drive up the prices. We do not let them set up retail shops for fear that the local baniya (who serves you adulterated dal and food grains) will go out of business. We need at least another two hundred fifty to three hundred billion dollars every year, to keep our economy growing. Ideally, we should not borrow. For, if we borrow, we will be unable to repay since we are perennially short of dollars. The only solution is that the politicians wake up and create an environment where the foreign money is having a sense of safety. They are used to taking risks. All they need is some comfort that the local laws do not surprise them (like Pranab Mukherjee trying to collect some dues on a transaction of many years ago or changing the laws every year). Or take our archaic labour laws. The fear of having to carry labour without having the ability to get rid of them is a big handicap. The leftist approach of ‘job security’ has resulted in jobs not getting created at all. The entire manufacturing base of the world has gone to China. We have missed out big time, thanks to the vested interests of our political leaders. To me, this is treason of the highest order, where they deny a better life to its citizens on the pretext of protecting them. India’s credit rating has always hovered between the highest in the junk grade (Double B) and the lowest in the investment grade (triple B). So there is not much to cry about, except that when one moves from investment to junk grade, a lot of money shies away from us. Many investors have charters that prohibit investment in to junk rated investments. They will be compelled to pull out any investments in India and new ones will be put off. It is not just an impact on cost of borrowing or investment, but an impact on how much money India can attract. The tragedy is that we have seen the benefits of opening up the economy in 1991 and now in the last two years, we have kind of pulled down the shutters. This clearly proves that the current PM has learnt nothing in spite of having been around in 1991. What this entire drama means for us is that a downgrade can have a bad impact on stock markets and on the exchange rate of the rupee. In turn, it will contract our economy besides adding to inflation. It is futile and illogical to argue that rating agencies are wrong. They do make mistakes. In this case, the only mistake they are perhaps erring is on the side of caution, I think. It is past being a wake-up call. Our economy can either recover to a 7 to 8 percent growth level or go back to the five and six percent rates. It all depends on whether the government has the courage to let go. In the meanwhile, it is best to keep one’s money in fixed deposits or in Fixed Maturity Plans or in Bonds of companies.


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