The finance ministry has overplayed its hand on a ratings/outlook upgrade for India so much that, when S&P just reaffirmed the old rating, a leading global news agency referred to it as a blow to the government. Given the improvement in several critical parameters in the last 9 months since P Chidambaram took over as the finance minister, it can be argued the rating agencies are behind the curve—the rupee has stopped its rapid fall and is at 55.1 to the dollar versus 55.6 when Chidambaram came back to the finance ministry last August, exports are growing instead of contracting and the Sensex is up from 17,257 at that time to 20,111 today. Inflation’s back looks like it has been broken, stuck projects are getting cleared, there are some signs of investment picking up, and the government has made a huge dent in cutting diesel subsidies—indeed, till the global economy recovers and oil remains reasonably-priced, India has that much larger a window of opportunity.
That said, and this is why S&P hasn’t changed the rating, India could just as easily slip back into a crisis mode, especially with elections always around the corner. The Food Security Bill threatens to derail fiscal progress, not only does the GST looks tough to implement before the elections, even getting the Constitutional Amendment Bill required for GST through will be an uphill task; and if elections get held sooner than expected, the whole fiscal equation could change especially if pre-election populism starts. And it’s not certain if the elections will throw up a stable coalition at the Centre either.
The larger point, however, is that the government is paying too much attention to the views of credit rating agencies who, ironically, are quite discredited anyway, especially after their role in the global financial crisis. Which is why people who have money are taking their own call on India. As compared to $9.8 billion in all of 2012, Indian corporates raised $9.2 billion of debt overseas in just January to May 2013. Despite a collapse in GDP growth to a likely 4.9% in Q4 FY13, the full year gross FDI inflows of $36.9 billion in FY13 are not too bad as compared to the FY09 peak of $41.8 billion; FII inflows, similarly, remain strong and, were the government to raise FII limits in gilts, a lot more can come in. In other words, ignore the rating agencies.