| |
India junks its currency
downgrade
By Indrajit Basu
KOLKATA - Standard & Poor's Ratings Services
rattled the Indian economic community last week by
downgrading the country's local rupee currency's
long-term sovereign rating to junk status, and stripping
the country of its investment grade. It slashed the
long-term sovereign local rating to "BBB-" from "BB+"
and the short-term local currency credit rating to B
from A-3.
"The local currency downgrade reflects
the government's growing Indian rupee debt burden and
its inability to staunch the financial weakening of the
public sector," said S&P managing director John
Chambers.
Among the concerns that S&P
articulated, and the country's most serious problem: its
burgeoning fiscal deficit - excess of the government's
spending over its revenues - which, combined with the
deficit of its states, is now more than 10 percent of
GDP.
The agency also cited "political
disagreements [that] threaten to set back India's
privatization program, which had been a success in
recent months. This hits the government's credibility,
deprives it of revenues that would have come in from the
sale of large state-owned firms, weakens investor
confidence and raises public debt".
The reaction
of Indian government, its industry lobbies and economic
experts was obviously knee jerk: "India's foreign debt
is only 3 percent of its total borrowing," said S
Narayan, secretary in the Ministry of Finance. "The
fiscal deficit itself, for the beginning of the fiscal
till date, is less than during the same period last
year. Also, both the central and state governments are
taking measures to repay high costs contracted earlier."
"Thus," added Narayan, "overall, we are looking
at an outlook where external balances are good. Food
grain stocks are good. Our ability for accelerated
repayments of external debt is very good. We are able to
conceptualize a scheme for internal debt restructuring
even for the states to reduce their debt burden, which
shows a kind of an inherent fiscal stability."
The industry lobby, too, is on Narayan's side.
India's two most powerful industry lobbies, the
Federation of Indian Chambers of Commerce and the
Confederation of Indian Industry, said in unanimity that
the downgrade was untenable by facts and that it
appeared to be more of a political statement than an
economic one.
"Nothing has happened overnight to
merit such a downgrade," said economists B B
Bhattacharya, director at the Institute for Economic
Growth, adding, "The debt problem is not new and
political differences have existed for some time now."
But even as the government and its sympathizers
downplayed the ratings cut, some economists and the
central bank, the Reserve Bank of India (RBI), agree
that India's domestic finances are a mess. In its latest
annual report, the RBI has revealed that in its pursuit
to ensure the success of borrowing of state governments,
the country has allowed states to borrow beyond their
allocated limits, and together with the government's own
borrowings, the country's internal debt situation is
fast getting to unsustainable levels.
Crisil,
the country's own top rating agency, shares this view.
"Clearly, what S&P is saying is that the concerns on
the domestic front are far greater than the concerns on
the external front," said Rupa Kudwa, chief ratings
officer of Crisil. "What is truly being said is that
unless something is done to tackle this on a serious
footing, it could possibly result in unsustainable
levels," she added.
Here is a quick look at some
of the facts on the debt situation in the country. While
it is true that federal debt as a percentage of GDP is
at a high 59 percent, it is also true that it has been
stable for the past three years. However, the total debt
lump of the country's state governments now is at a high
of US$121 billion, which is about 23 percent of GDP.
There is also a growing concern about the guarantees
given in the past by Indian states for raising money,
which at $35 billion has not been budgeted for in the FY
2001-03 federal budget.
So there is reason for
worry, says Crisil. In its recent report, the agency
says state governments are likely to encounter debt
servicing obligations of around $1 billion over the next
five years, starting from 2003-04. In fact, an internal
note of India's finance ministry cites this report to
say that the "huge defaults have mounted on loans
guaranteed by state governments and such defaults in all
probability could impact upon India's sovereign rating".
But beyond bringing the country's fiscal
mismanagement into the spotlight, perhaps the S&P
downgrade has inflicted an even bigger blow. "India
tends to see itself as one of the global economic
biggies," said noted economist and editor T N Ninan.
"And despite some recent troubles, it sees itself as a
reforming economy, the fourth largest in the world
[using purchasing power parity] and one that has
performed very creditably over the past couple of
decades.
"So it comes as a rude shock when
S&P brackets India along with Guatemala and El
Salvador, not to speak of Kazakhstan and Costa Rica, and
says that the domestic bonds that the government issues
are no more than junk bonds."
Experts who agree
with S&P add that while India may (or may want to)
rank among the global biggies, in hard economic terms
the country counts for pretty little: less than a 1
percent share of world trade, less than a 1 percent
share of global capital flows, less than 1 percent of
the citations in technical journals, a miserable share
of global patents, less than a 1 percent share of
international tourist traffic.
The experts say
that if the various countries in the world were to
derive their size on a model of the globe to reflect
their economic significance, India would show up as
roughly the geographical size of Pakistan or Bangladesh.
"From that perspective, it is easier to focus
coolly on the question posed by S&P: Are we in or on
the edge of a domestic debt trap?" says Ninan. "In one
respect, the question has an easy answer: since the
government can always print money, there can never be
the risk of default on domestic public debt, in the way
that there is with foreign debt."
But according
to Ninan, there is more to it. "No government can print
endless currency notes and buy its way out of trouble,"
he says, "because if it printed that much money, it
would create hyper-inflation, serious external
imbalances and general economic chaos. So it does matter
if the level of domestic public debt is high."
However, no one is too alarmed, just yet. "To
find out if India is in a debt trap [which means
borrowing more and more to stay in the same place], one
must compare the real rate - adjusted for inflation - of
interest on government debt with the growth rate of
GDP," said Ninan.
When one makes such a
comparison, one finds that "the answer is, no," he said.
"Ten-year government bonds now command an interest rate
of 7.2 percent. Adjusting for inflation, the real rate
of interest is about 3.7 percent, while the GDP growth
rate is still above 5 percent. So, India has a 1.3
percent cushion."
But the S&P's action
should be read as a warning, they say. "Yes, one could
rubbish S&P," said Ninan. "But the constructive
course would be to get the reform program and fiscal
rectitude back on track and take S&P more seriously
than India has."
Meanwhile, other international
ratings agencies are not quite convinced. Fitch and
Moody's, for instance, said that they planned to review
India's credit rating in coming months. Fitch earlier
this year lowered the local currency to negative outlook
by rating it below investment grade, at "BB+".
(©2002 Asia Times Online Co Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
|
| |
|
|
 |
|
