Moodys Blues

To start with, it would seem that the analysis in the report has been overtaken by events. The constant refrain that fiscal slippages have been tolerated and that there have been no reforms has been answered quite appropriately by the Budget. This may be dismissed as an occupational risk. Moodys cant be expected to anticipate the Budget. But what it can be expected to deliver is accurate numbers. And the fact is that Moodys has got some crucial figures wrong. To start with, the general government deficit fiscal deficit of the Centre and the states was not 9.5 per cent last year. The combined deficit of the two levels of government was marginally less than 8 per cent. Similarly, the debt/GDP ratio is much less than what is given in the Moodys report. The outstanding public debt is currently around 40 per cent of GDP. Even if other liabilities like small savings and provident funds, are taken into account, the net liabilities dont add up to more than 65 per cent of the GDP. Moodys puts it, for some reason, at

77 per cent.

It is not easy to discover how safe a borrower is, especially when the borrower is a sovereign authority. The significance, if any, of this type of ratings is in setting out the relative position. It can be argued, therefore, that the situation in the Indian economy today is significantly better on most counts than in late 1994, which is the last time Moodys upgraded India. Moodys answer to this, it seems, is that most other economies with a similar rating have better economic indicators, and that by this yardstick India is, if anything, somewhat over-rated. This depends on what view one would take of economies like South Africa, Poland and some South American economies, which too have a Baa3 rating. Perhaps some of them have better indicators, but it is hard to see them doing better than India on growth (7 per cent over the past three years) or on the rapid improvement in macro-economic variables.

This is borne out by the statistics given in the Moodys report itself. Even on their own forecast, the deficit in 1996-97 and 1997-98 is lower than it was in 1994-95. The rate of investment is almost 2 percentage points higher and the saving-investment gap has also narrowed since then. Debt, which seems to be a source of concern to Moodys, continues to decline as a percentage of GDP and so does debt servicing. Unless it is argued that the December 1994 upgradation was premature, it is hard to see why there should not be further upgradation now. What emerges from this is that the rating rationale, even when based on hard and correct facts, is ultimately a highly subjective exercise.