Question is whether our economy is looking better
HDFC Bank CEO and MD Aditya Puri, and now economic affairs secretary R Gopalan make a convincing case when they argue the bias of rating agencies like S&P by citing the ratings for countries like Italy and Spain – none have any growth to show compared to even India's dramatically lowered fortunes and their debt position looks considerably worse. The inability of these countries, and their banks, to raise the capital they need is at the heart of what can be called the European meltdown, and yet they enjoy credit ratings that are higher than India's. Even though it is possible to argue, as FT's Martin Wolf does, that the current European crisis is more a liquidity one than a debt one, let's assume the finance ministry is right in that global rating agencies are biased. What then? What do you do about the spate of lowering of growth projections made last month by Morgan Stanley, CLSA, BoFA-Merrill and others?
With IIP at 0.1%, following a disastrous -3.5% in the previous month, it's clear FY12's weakness is carrying on in FY13. As a result, there has been a sharp rise in loans coming up for restructuring – the ratio of non-performing assets and restructured assets is close to 8% of all outstanding loans, a high number. And while it is true the current account deficit will look better in the coming quarters with oil prices coming off, there is little doubt India's much-vaunted forex reserves aren't as much of a security as made out. For one, $133 bn of the $290 bn of reserves are loans owed to European banks which are under pressure to recapitalise their balance sheets and large amounts of this can be withdrawn. A recent analysis by Citigroup says the ratio of India's forex reserves to short term debt by remaining maturity has fallen from 3 in 2007 to an estimated 1.5 this year – Citi classifies India as one of the 'more externally vulnerable' countries.
None of this is to say India cannot turn around, indeed a rate cut will change the mood, but apart from a hostile global environment, India has deeper structural issues. There is the distinct anti-business attitude of the government – the hounding of Vodafone and a doubling of income tax disputes to Rs 436,741 crore in December 2011 are good examples. And the sharp rise in government expenditure has ensured savings rates have collapsed from 36.8% of GDP in FY08 to 30.4% in FY12 – this, above all, is the main reason for the secular slowing in India's growth story. Instead of junking rating firms, the government would do well to get its act together, to rein in the taxman, to correct the fiscal deficit, to pass critical legislation.