Credit Where Credit Is Due

by V Anantha Nageswaran - Nov 17, 2017 03:31 PM +05:30 IST
Credit Where Credit Is DueMoody’s Investors Service
Snapshot
  • Philosophically, the government is better off doing its job and letting rating agencies arrive at their conclusions at their own will and pleasure.

    In the long-run, it is only a marginal factor.

The surprise news on Friday morning was that Moody’s Investor Services upgraded India’s credit rating to Baa2 from Baa3 and changed the outlook to ‘stable’ from ‘positive’. About a year ago, S&P had ruled out an upgrade to India’s sovereign rating for at least two years. Their rating is BBB-, similar to Moody’s pre-upgrade rating of Baa3.

The Government of India and its Chief Economic Advisor have, on several occasions, criticised the rating agencies for their slow response or non-response to India’s improving or sound fundamentals. They may have a point because for foreign investors, the ratings agencies’ decisions are useful signposts, whether correct or not, justified or not. They do not have the time to go into depth. They go by the so-called ‘due diligence’ done by the rating agencies.  To that extent, the optics of a good rating matters.

But, philosophically, the government is better off doing its job and letting rating agencies arrive at their conclusions at their own will and pleasure. In the long-run, it is only a marginal factor. But, politicians in democracies with regular elections (with elections to states, it is worse, in India) are anything but long-term.

The timing of the Moody’s upgrade is a surprise because the day before, India’s Finance Minister, speaking at a Morgan Stanley forum, had said:

No pause (on fiscal consolidation) but challenges arising from structural reforms…could change the glide path.
Arun Jaitley at the annual Asia Pacific meeting organised by Morgan Stanley in Singapore.

In plain English, the Government of India is all set to miss its fiscal deficit target for 2017-18 and there might well be a slippage in 2018-19 compared to the target set out earlier. Whether it is good or bad and whether it is for the right reasons or wrong reasons are separate debates. But, that is the truth and hence, Moody’s might be a bit embarrassed about its timing.

Further, the Government of India has sought a special dividend from the Reserve Bank of India to pay for its bank recapitalisation. All told, that may not be deemed a credit positive. Employees’ union in the central bank has opposed it.

All that being said, the Government of India deserves praise (I am not being cynical here) for managing the international optics better in recent times. It earned a 30-ranking jump in the ‘Ease of Doing Business’ ranking thanks to the implementation of the Goods and Services Tax (could have been done far better) and Insolvency and Bankruptcy laws. The latter, for all the gaming being attempted by borrowers, is somehow, going well and as one would expect. There is learning and there is a quiet determination on the part of the creditors to use it to bring wilful defaulters-debtors into line.

Whether we are government supporters or not, any observer has to acknowledge that India’s business environment is undergoing a structural transformation, for the better. The big boys are being dragged, ‘kicking and screaming’ into better behaviour and not rely on their connections. Well, some are above the fray, still. That has to wait for some more time, I guess.

So, the government deserves credit for improving the optics. They do matter. Further, India’s credit rating at Baa3 was a bit harsh compared to the single A rating that China enjoys with its own poor public debt and fiscal deficit dynamics. Ask the IMF or check out my brief for the Gateway House published in September.

The relevant tables are worth re-publishing. IMF, in its Article IV consultation report, generated the gross public debt and fiscal deficit dynamics for China up to 2022. Contrast that with what the IMF estimated for these two parameters one year ago. The two tables are reproduced below:

Source: * Projected figures | Source: People’s Republic of China 2017 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2017 (Table 1, page 43)
Source: * Projected figures | Source: People’s Republic of China 2017 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2017 (Table 1, page 43)
Source: * Projected figures | Source: People’s Republic of China 2016 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2016 (Table 1, page 39)
Source: * Projected figures | Source: People’s Republic of China 2016 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2016 (Table 1, page 39)

Fiscal deficit minus expected revenue from land sales equals net lending/borrowing in the above tables. In other words, properly accounted fiscal balance and public debt are worse than India’s general government (centre + states) fiscal balance and public debt.

The table below provides corresponding figures for India on general government deficit and debt to facilitate comparison.

* Projected figures | Source: India 2017 Article IV consultation—press release; staff report; and statement by the executive director for India, International Monetary Fund, February 2017 (Table 7, page 62)
* Projected figures | Source: India 2017 Article IV consultation—press release; staff report; and statement by the executive director for India, International Monetary Fund, February 2017 (Table 7, page 62)

Despite the recent downgrade in May this year, China has an A1 credit rating from Moody’s.

As for India, whether it would result in enhanced foreign investor interest in Indian stocks and bonds, I am not so sure. Most of them would be inclined to look through the upgrade in the light of recent data in India. The Indian rupee has strengthened almost a full percentage on the news. It is trading below 65 to a (US) dollar. There is room to think that this is as good as it gets for the Indian rupee.

India’s October inflation and trade data were both disappointing and worrying.

India’s consumer price index (CPI) inflation and wholesale price index (WPI) came in higher than expected. At 3.6 per cent, CPI inflation was slightly higher than market expectation of 3.5 per cent and vs. 3.3 per cent in September. WPI inflation also recorded an annual percentage change of 3.6 per cent but it was well above  market expectation of 3.0 per cent and 2.6 per cent in September.

India’s trade deficit for October was much higher than expected. Exports at $233.6 billion was 1.6 per cent lower than the level in October 2016. Imports were $371.2 billion in October, about 7.65 higher than it was in October 2016. Oil imports rose sharply in October 2017 over October last year (+27.9 per cent) and oil imports were also higher in the period between April – October 2017 compared to April – October 2016 (+20.2 per cent). It is mainly the oil price effect and there has been no big  change in the volume of import.

Non-oil imports were higher by 2.6 per cent in October 2017 vs October 2016. But, for the April – October 2017 period, they were sharply higher (22.8 per cent) over the same period last year.

Merchandise trade deficit was $86.1 billion for April – October 2017 vs. $54.4 billion in the same period last year. Including services, the deficit was $52.6 billion vs. $22.1 billion in the same period last year. Source: See the press release from the Ministry of Commerce.

In sum, the quick and sharp jump in WPI and CPI and the October trade numbers show how weak the foundations of the Indian economy are, in terms of productivity. It is an economy that is hemmed in from many sides – production, distribution, infrastructure and governance. Long way to go.

Neelkanth Mishra of Credit Suisse wrote, after seeing the October trade numbers, that, “the fog on the economy now extends to the currency as well.” Oh, well.

So, the Government of India should count November 17 as a lucky day.

This piece was first published on the writer’s blog, The Gold Standard, and has been republished here with permission

V. Anantha Nageswaran has jointly authored, ‘Can India grow?’ and ‘The Rise of Finance:Causes, Consequences and Cures’

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