Economists question rationale

Economists find it difficult to believe that Moody’s has upped the grading of India’s local currency debt by a notch to investment grade from junk, saying the country’s growth and fiscal consolidation story is not as rosy. A depreciating rupee against the dollar gave another ammunition to economists to cast doubts over the rating agency’s action.

“Given that the rupee is depreciating to record-low levels and the country is facing high fiscal deficit, I do not see a trigger for Moody’s to have upgraded the ratings to investment grade,” Anis Chakravarty, director of Deloitte, Haskins & Sells, tells Business Standard. “I seriously don’t understand the reason for the move.”

Stating that Moody’s might have its reasons, Chakravarty said the outlook for the economy is far from stable.

HDFC Bank chief economist Abheek Barua say he has yet to fathom the goings-on. “Looking at the fiscal situation of the country, India does not deserve to be in the ‘investment bracket’ at this point of time,” he adds.

Barua says he could sense an emerging market bias, but points out that the rating is conflicting with the short-term fiscal environment of the country. Moody’s actions may have stumped economists not associated with rating agencies. But those associated with these agencies did not see any surprise element in the Moody’s move.

“The upgrading of the ratings is totally justified,” says Madan Sabnavis, chief economist, CARE Ratings. “If we look at India’s overall situation, it is performing well, compared to other countries right now.”

The expert notes that fiscal deficit is high according to India’s standards, but “not high” by global standards. “The UK and other countries in Europe are running much higher fiscal deficits. India is doing better than many nations despite the global economic slowdown.”

Sabnavis asserts that India definitely deserves a high rating. “Secondly, in emerging economies, government needs to spend. So, fiscal deficit cannot be 1-2 per cent of the GDP, unlike in the developed countries,” he argues.

In the first seven months of the financial year, India’s fiscal deficit has already touched over 74 per cent of the Budget estimates for 2011-12. In the first six months, the fiscal deficit was 6.7 per cent of GDP, trashing all government optimism of reining in the deficit to 4.6 per cent of the GDP.