Lobbying with Moody's, a bad step

Reports that the Narendra Modi government tried to lobby with the international credit rating agency Moody’s for a ratings upgrade of the country have not brightened its image. But the agency refused to change its evaluation of the country’s economic and financial situation, arrived at on the basis of a number of parameters. Many countries are unhappy with such ratings but it is unusual to lobby or put pressure on the agencies. There have always been suspicions that the agencies have biases. They have also made errors of judgment in the past. But they are not easily persuaded to change their views. Moody’s has given India the lowest credit rating and it has not changed it since 2004. The other two major agencies — Standard & Poor’s and Fitch — have also given India the lowest investment grade. They have refused to revise the rating, now or in the near future, though the country outlook has been upgraded to “stable.”

It was expected that the many reform measures taken by the Modi government would change the economic fundamentals and impress the agencies. Deficits have come down, an inflation targeting policy has been adopted, the macroeconomic situation is better than in 2013 and India is the fastest growing large economy. In emails and letters, the government contested the agency’s view on the ground that it had not accounted for the decline in the country’s debt burden and had ignored the countries’ levels of development when assessing their fiscal strength. It also questioned Moody’s methodology. There may be some merit in these arguments but the point is that they do not have as much bearing on the issue as claimed by the government. The agency did not accept these conten­tions because it felt the debt levels were still high and the banking sector was badly weighed down by bad loans. Other factors like weak public finances, revenue underperform­ance, low GDP per capita and lack of private investment are also conc­erns. These need to be addressed by the government before it can hope for a rating upgrade. Claims are not enough, results have to be shown on the ground. The fiscal situation has to improve further, banks should become healthy and there should be steady performance on inflation and tax revenue fronts. Investments should rise.

Ratings by international agencies are important because big institutional investors base their decisions on them. A ratings upgrade will help attract more capital from outside on better terms and will boost growth. But India has to wait and work for it. Lobbying will not help and will only bring a bad name. When the economy actually improves, better ratings will follow.