There is an ongoing debate on credit rating agencies and their pronouncements on India. Two global credit rating agencies — Standard and Poor’s and Fitch — have downgraded their outlook for India. Even while it is a macroeconomic development, it is expected to have negative impact on stock markets and hence investors.
Many investors have cha-rters that prohibit investment in junk-rated countries. They will be compelled to pull out any investments in India and new ones will be put off. It will not just impact the cost of borrowing or investment, it will also affect how much money India can attract thro-ugh foreign investment in stock markets.
However, the downgra-des have been greeted with contempt and our leaders have found fault with the rating agencies. Many take irrelevant numbers to compare India with other nations and feel strongly that we are better than so-and-so country that has a higher rating, etc. Naturally, we get emotional about it and think that as a nation we will never default. But history is witness that we have defaulted at least twice post-Independence.
The Indian economy has always been short of being investment grade on a standalone basis as we are always short of dollars to pay our import bills in absence of FII flows into our stock markets. Yes, we can get a higher credit rating if we stop importing oil even while everything else — such as software earnings and NRI remittances — remain the same. Frankly, I think this is not possible. If we stop importing oil, one can ima-gine the ripple effect.
Another option is to stop buying gold as it would improve our balance of payments and hence improve our credit ratings. But it has to be voluntary and not forced. If we can control our appetite, we can get a better credit rating. However, controlling one’s appetite is blasphemous! How does one make a case against buying gold or driving cars? It is simply not done.
Structurally, we have a receipt and payment account, where our payments exceed our receipts by nearly a billion dollars every day! For a full year, we have a shortfall of $300 billion! While we get close to $5 billion every year as Non-Resident Indian remittances, we have a serious problem for the rest of $295 billion.
We can either borrow or make the foreigners send in money in dollars to invest either in industry or our stock markets. Borrowing cannot be an option as it will further increase the demand for dollars for interest payments. So we need to attract investment, but unfortunately we do not permit foreigners to invest freely anywhere.
For example, we do not let them invest in agriculture for the fear of them driving locals out of farming. We do not let them set up retail shops for fear that the local shopkeeper will go out of business. The only solution is that our politicians wake up to the reality and create an environment where mo-ney coming in has a sense of safety. Foreign investors are used to taking risks. All they need is comfort that the local laws do not surprise them (like Pranab Mukherjee’s attempts to collect dues on transactions held years ago).
Take our archaic labour laws. The 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 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.
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. 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.
Our economy can either recover to a seven- to eight- per cent growth level or go back to the five- and six-per cent rates. It all depends on whether the government has the courage to act. So it is best to keep one’s money in fixed deposits or in fixed maturity plans or in bonds of companies.
(The author is an independent investment adviser)