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Tuesday, 26 June 2012 00:07
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Moody's gives departing FM the report he wanted

Two global rating agencies lowering their outlook on India under his watch was bad enough, the third one doing this would have been really unkind, more so as this would have come on the last day of Pranab Mukherjee’s four decade-long public life. To that extent, Moody’s retaining the stable outlook on India just the day before Mukherjee stepped down to prepare to be President, was a pleasant surprise. Moody’s argument, rarely made before by a rating agency, is that India has always had a ‘weak fiscal performance, tendency towards inflation and an uncertain investment policy environment’—in other words, what’s new about the current crisis?! Moody’s added India’s government debt and fiscal parameters had, in any case, always been worse than those of its peer group.

While that is in keeping with the line argued by one government official after another over the past few months, what’s interesting is why Moody’s has chosen not to let the current crisis affect its mood. Moody’s says India has been through such crisis before—in 2002, it says, no one would have anticipated the 2003-08 rebound which also ensured the fiscal deficit got corrected in a big manner. As for the problems India Inc is facing at the moment with its FCCBs, Moody’s says it doesn’t matter since there is no sovereign guarantee.

All of this is great news, but it makes you worry about what goes into Moody’s ratings. What it says about 2003-08 is right, but this was the result of a global boom and, right now, we’re talking a worsening of the global environment, with all its attendant consequences as far as exports and forex inflows are concerned. Indeed, with exports more closely related to global imports growth rather than the value of the rupee, it is not clear how Moody’s sees the rupee depreciation as a silver lining—a falling rupee, along with falling profits growth for India Inc, also drives FII inflows away. India Inc’s borrowings, it is true, have no sovereign guarantees, but with debt restructuring at an all-time high, and the worsening power sector loans yet to come (!), the burden of recapitalising banks does fall on the government. But no matter how flawed Moody’s logic, it was a fitting parting gift to Pranab Mukherjee. For that, we welcome it.


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