Life beyond Moody's rating

The upgradation of India's sovereign rating by US-based rating agency Moody's is a welcome sign of the increasingly changing perception of India's inherent economic strength. Coupled with a higher ranking in the Ease of doing Business, assigned by the World Bank, it imparts a feel-good mood when it is needed most for the macro economy, especially in the wake of the criticism about demonetisation and the GST rollout. But after the dust settles down, the common man cannot be faulted if he is left wondering what the euphoria about the rating upgrade is all about. To the perceptive observer, the rating agencies have been at best, capricious by nature.  They have not covered themselves with glory always, especially in the light of their track record of having rated mortgage-backed securities in the US as AAA in the last decade which led to investment banks in the West taking wild bets based merely on the ratings. What happened due to the resultant meltdown in 2008 is part of financial folklore. Splitting the spoils among themselves, three rating agencies, Moody's, Fitch and Standard  & Poor's, all US-based, control 90 per cent of the sovereign ratings market. These ratings are used by international investors and the higher the rating, the better the chances of foreign investments flowing in. Also, a higher rating may lead to lower cost of borrowings by the countries, the better-rated corporates and banks in these countries in raising foreign currency debt.

For long, there has been valid criticism of the methods and the apparent biases in these ratings. Prime Minister Narendra Modi himself had proposed the setting up of a rating agency by the BRICS countries at its summit in Goa a year ago. And the Economic Survey, piloted by our Chief Economic Advisor, Aravind Subramanian, in January this year had mocked at these agencies over their "Poor Standards".  Slamming the agencies about their emphasis on per capita income levels, the Survey said: "Lower middle income countries experienced an average growth of 2.45% of GDP per capita (constant 2010 dollars) between 1970 and 2015. At this rate, the poorest of the lower middle income countries would take about 57 years to reach upper middle income status. So if this variable is really key to ratings, poorer countries might be provoked into saying, "Please don't bother this year, come back to assess us after half a century." That was a perfect cock a snook at the inherent Westward bias of the rating agencies. The Survey's pitch, from a developing country's perspective, was rational and fact-based.  One may also recall that both the big two daddies of international rating reached settlements in the US to come out of litigation related to their horribly wrong prognosis of mortgage-backed securities.

While Standard & Poor's paid $1.375 billion to settle a US justice department-led lawsuit that alleged that the firm had defrauded investors by issuing inflated ratings in the years preceding the financial crisis, Moody's reached an agreement for $864 million with the US justice department and 21 states, which accused the company of inflating ratings on mortgage securities that were at the centre of the 2008 financial crisis. India's sovereign rating has not had any impact on its economic growth.  Foreign currency borrowings by the Indian State have been minuscule in comparison with its domestic borrowings. India has never defaulted on its foreign currency borrowings. As for private companies, there have been instances when they have pierced the sovereign ratings and borrowed at lower costs than the sovereign, Reliance Industries being one such example. Further, rating agencies have been consistently behind the curve as theirs is a vocation which normally is not associated with any responsibility. For good order's sake, it will be worth recalling that India enjoyed an A2 rating in the 1980s and it took the foreign exchange crisis of 1991 for Moody's to push us down below investment grade. So much for their prescience and research!

Recent economic history also tells us that if governance standards are improved, there are enough resources and talent within the country itself to build the India growth story, ensuring employment opportunities as well. And from a macro-economic standpoint, foreign inflows are needed just to fund the investments-savings gap. India's domestic savings rate has been historically high. For the man on the street and indeed for a vast majority of people, however, these ratings do not mean anything. What has the price of essential commodities got to do with external rating? At what prices are tomato, onion and potato selling in the local vegetable market is more material to the common man than how the rating agencies view India. Whether services in Government offices and public utilities like banks are friendly and accessible, whether drinking water, primary health facilities and education are available at reasonable rates, whether there are motorable roads - these are the nagging questions which bother the ordinary person. There is a long way to go before these services become assured to all Indians.

International ratings, the resultant gyrations in the Sensex and the media attention may be par for the course as far as the chatterati are concerned. What the ordinary man wants is perhaps an index or a rating which would measure the Ease of Living which incorporates basics like food prices, ease of accessing Government services including primary health, education and law and order...  A discussion about Moody's and Fitch may well be as obtuse as Quantum Physics to the common man. It is time we thought of an index which will measure the Ease of Living, which the Prime Minister himself has pointed to, as a barometer for our daily "business of living".

(The author is a public sector banker. Views are personal).