The Telegraph
Since 1st March, 1999
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Standard and Poor has downgraded India’s credit rating. It has two different ratings, one for sovereign local (rupee) debt, the other for sovereign foreign currency debt. The adjective, “sovereign”, means it is the country that is being rated. Each rating has separate long-term and short-term components. The external foreign currency rating remains unchanged at BB for long-term and B for short-term debt and has not been downgraded. This is understandable. Whatever indicator one uses, India’s balance of payments is in excellent shape, the most visible aspect being foreign exchange reserves of 60 billion dollars plus. However, India’s local currency rating has been downgraded from BBB- to BB+ for long-term debt and from A3 to B for short-term debt. India is now in the same category as Peru, Costa Rica and Guatemala. This follows an earlier downward revision in August 2001, when the long-term local currency rating was lowered from BBB to BBB-, while the other three ratings were unaltered.

Explaining the present downgrading, Standard and Poor has mentioned poor state of government finances and a growing debt burden. Internal sources have also raised alarm signals over high fiscal deficit to gross domestic product or debt to GDP ratios. But have these indicators become markedly worse since August 2001' The answer is clearly no. Standard and Poor is not reacting to government inability to repay debt, but to perceptions that reforms have slowed. The perceptions have been fuelled by postponement of the Hindustan Petroleum Corporation Limited/Bharat Petroleum Corporation Limited privatization decision, questions about overall privatization and delay in hiking equity caps on foreign direct investment in some sectors.

Standard and Poor and internal analysts in India are not wrong in surmising that the suggestions made by the N.K. Singh committee on FDI do not amount to reform unless the recommendations are implemented. It is also true that slowdown in privatization receipts increases pressure on government borrowings. But to argue that this catapults India into the Peru, Costa Rica and Guatemala league, even if investor sentiments react adversely to lack of reforms, is stretching things a bit. Standard and Poor or other credit rating agencies base their ratings on perceptions and expectations rather than objective data, and are not infallible. While fiscal problems built up in India during the Eighties, there was no immediate trigger for the substantial downgrading in 1990-91. Standard and Poor and their ilk over-rated India before 1990-91 and under-rated India in 1990-91. Hence there is no reason to over-react to what Standard and Poor has done, as the government did in August 2001. FDI and portfolio investments are influenced more by other factors than Standard and Poor ratings. Nor is it the case that stock and foreign exchange markets will immediately take a beating. Hypothetically, interest costs of borrowing might increase a bit. But how many corporate organizations are interested in borrowing right now'

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