S&P: India risks losing investment grade rating

[Brahmanyan]

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All Newspapers carry a Disturbing News on their front page today. That is, according to the S&P ratings, India is facing the risk of losing investment grade rating and S&P has threatened to downgrade India's sovereign credit rating to ‘speculative' from the lowest notch of ‘investment' grade.Some details are available in"The Hindu" of date :
The Hindu : Business / Economy : S&P: India risks losing investment grade rating

Interestingly the analysis carries known facts for the down fall.“ It pointed to the division of roles between a politically “powerful” Congress president and an “appointed” Prime Minister as having “weakened the framework for making policy, in our view". “Moreover, paramount political power rests with the leader of the Congress, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected Prime Minister Manmohan Singh, who lacks a political base of his own,” it said.

How long the politics of "bluff" carry the burden of inflation? Now it had burst at the international level of Credit Rating.

Brahmanyan,
Bangalore.

 

[prasad1]

"Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating," S&P said in a statement on Monday but dated June 8.

"The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalization in the event of unexpected economic shocks," Mukerji said in S&P's Monday statement.
The government's inability to push through reforms is widely blamed for yawning current account and fiscal deficits that have driven the rupee to a record low against the dollar. In addition to slowing growth, India is plagued by persistently high inflation.

India could be 1st BRIC to lose investment grade: S&P - Yahoo! News India

 

[venkat2206]

GDP growth was the lowest as compared to past five years. Inflation is certainly high. Unfortunately, the statement regarding political situation is true. However, a good monsoon along with increased industrial outputs will certainly revive the economy. Let us hope for the best in the new Financial year.

Venkat

 

[biswa]

Something I have been pondering. The credit rating probably matters little, as India seems to issue so little sovereign debt. Anybody ever remember buying Indian "treasuries"? The closest I can remember are post office bonds and some RBI bonds once in a while. Hence unlike the Euro countries and US who issue lots of government debt, India is never in a credit crunch.

India has a different method of conducting monetary policy. The RBI simply prints a lot of Rupees. It has to ask permission from nobody, including bond markets to do that. Of course this results in high inflation. That is why inflation in India is never below 10%.

 

[mahakavi]

I am not sure that Indian government does not issue bonds. It may not be called bonds but by some other name such as unit trust etc. Surely they borrow from the public. They have a budget and have to specify income and outgo. Somebody can look at the latest budget and get the facts.

As for S & P rating, except on rare occasions, they are right on the money when they call the shots. The investment grade rating, if dropped, will cause the IMF and World Bank to raise the rates at which India can borrow money for their development projects, which are multi-billion dollar projects anyway. Besides, the drop in rating will encourage the foreign funds which invest in Indian stock market to pull and/or short-sell securities causing a collapse of the market.

 

[Brahmanyan]

Something I have been pondering. The credit rating probably matters little, as India seems to issue so little sovereign debt. Anybody ever remember buying Indian "treasuries"? The closest I can remember are post office bonds and some RBI bonds once in a while. Hence unlike the Euro countries and US who issue lots of government debt, India is never in a credit crunch.

India has a different method of conducting monetary policy. The RBI simply prints a lot of Rupees. It has to ask permission from nobody, including bond markets to do that. Of course this results in high inflation. That is why inflation in India is never below 10%.

Dear Sri "Biswa",

I agree with your views. RBI/Govt. does issue treasury bills auctioned at discounted rates which can be redeemed at par. These are mostly invested by Provident Funds, in view of low risk.

While dealing with the subject of Currency I wish to share the following information, which I read recently.

Today we use the concept of "fiat Currency - that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government. It is often associated with paper money because, without government fiat or guarantee, bank notes are not a legal tender in payment of debt, and only specie (metal money) has unlimited legal tender for money debts". After opening-up of economy, India has gone in for managed paper currency standard and currency is not convertible into gold.To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India.

"The inherent value of paper money is zero, except when it is measured against the value of consumables the bearer of such worthless paper can exchange for each unit of currency in his or her possession. Additionally; paper money has an intangible value that is directly related to the condition of need of its bearer. While a one hundred rupee currency may be inconsequential to a person with little material need the same may be the governing factor between homelessness, health, and even life for another with lesser means.. In other words, paper money is valued at the maximum amount of consumable for which it can be traded either directly or indirectly."

Regards,
Brahmanyan,
Bangalore.

(I have taken the information mostly from the answers given by Dr.VSR Subramaniam, Expert in Economics, my thanks to him - B)

 

[biswa]

I think the S&P, Moody's etc have lost all credibility. Today they downgraded Spain, yesterday they downgraded Spanish banks. I mean today? Talk about bolting the barn door after the horse has fled. What's the point repackaging globally available public knowledge? The smart money had left Spain weeks ago.

 

[mahakavi]

But before downgrading today, the rating agencies put Spain on "watch" a while ago. They might have also qualified the watch as possible downgrade. That was the indication for smart money to exit. The reason for putting the country or the banks on watch is to let the country/bank know they have to shore up their finances in the immediate future. When it did not happen the downgrade was slapped. They don't downgrade overnight because that will lose credibility too.

 

[Iyyarooraan]

Unfortunately there has never been a good Indian economist to speak for the country. But Indians who contribute to the economy have robust common sense and all the 'tantalizing' ratings given by the agencies have no relevance to our working economy. All the economists who have been on the podium are followers of US policy. These include MM, PM and PC and our so called industrialists. Indian will never accept the American style of living. There are a few groups aping the American life. As a matter of fact plastic money is not working. Wherever these are, plastic money, they are in the entrenched sections - like big Companies, MNCs, Banks, SOME BPOs and some secluded class of people. Malls are not successful in areas where there are rich but ordinary Indians. Many Malls have been closed down. A few malls are doing unfair business. The class which do not know where their wealth is coming from are only frequenting the malls. Coming to the point of ratings, these agencies owe their existence to the uncle Sam. They are supposed to tweak countries like India to fall in their line. America does not want Europe to prosper. But the US's ally, UK, is doing service for the US. These background reasons though known, are not discussed in the 'elite' group of people. If they discussed there will be no more 'elite' group. And who are all the people in the 'elite' group? The people who always support the US. It is high time we nurtured economists who have oriental wisdom.

 

[mahakavi]

Unfortunately there has never been a good Indian economist to speak for the country. But Indians who contribute to the economy have robust common sense and all the 'tantalizing' ratings given by the agencies have no relevance to our working economy. All the economists who have been on the podium are followers of US policy. These include MM, PM and PC and our so called industrialists. Indian will never accept the American style of living. There are a few groups aping the American life. As a matter of fact plastic money is not working. Wherever these are, plastic money, they are in the entrenched sections - like big Companies, MNCs, Banks, SOME BPOs and some secluded class of people. Malls are not successful in areas where there are rich but ordinary Indians. Many Malls have been closed down. A few malls are doing unfair business. The class which do not know where their wealth is coming from are only frequenting the malls. Coming to the point of ratings, these agencies owe their existence to the uncle Sam. They are supposed to tweak countries like India to fall in their line. America does not want Europe to prosper. But the US's ally, UK, is doing service for the US. These background reasons though known, are not discussed in the 'elite' group of people. If they discussed there will be no more 'elite' group. And who are all the people in the 'elite' group? The people who always support the US. It is high time we nurtured economists who have oriental wisdom.

There are some truthful statements mentioned above. The aping of western habits that appeal to the up and coming money-oriented generation does not bode well for Indian culture now or down the road. The existence of malls is something one cannot wish away. They are the trend for those who aspire material goods. The so-called "oriental wisdom" will not help you in this modern materialistic world. Japan used to boast of their isolated culture and their contemptuous expression "gaijin" (foreigner) was an example of that. Look where is Japan now. There is a segment which still nourishes the oriental culture but the current generation there is head over heels hooked to western habits.

There are also unfounded allegations above. The rating agencies are a free market phenomenon. They do not play the tune desired by the US government. They don't discriminate between companies or countries. They go only by hard realities. Besides downgrading European bonds, they also downgraded US debt too recently. They earn their living by laying out the facts, however ugly they are and wherever they are found. Surely when they downgrade a country's debt that country is bound to get offended. It is similar to a teacher failing a student in a class. Is it justified that the student takes revenge on the teacher (unfortunately it happened recently in a private school in Chennai where a student killed his teacher in front of all students in the class for failing him)? America does not want Europe to fall. In their own interest of trade they want Europe to prosper. Perhaps it is a different case with China. China has built up an enormous trade surplus with US and it is a thorn on the side of US. India cannot live in isolation. Trade and finance are globalized now whether one likes it or not. Imagine if the software outsourcing was not given to India 15 years ago where will India's economy be. That was a catalyst for general economic growth. The 9% average growth in the GDP in India was largely due to software, and BPO (outsourcing). The high oil prices of the last few years would have wiped out India's balance of payments if it were not for the revenue earned by Indian software companies from around the world.

Eastern wisdom will not fill the dinner plate. If one does not care about that it is a different story. But the current expectation belies that. We cannot go back to 19th/20th centuries. Time travels only in the forward direction.

 

[biswa]

I still stand by my belief that the output of rating agencies is absolute hokum, as far as being financially useful. And I have a simple way of proving that.

Suppose I work on Wall St and I happen to have this great insight (before everybody else) that Spain is going to crash. Will I go shouting from the rooftops crying wolf? Or will I be busy at my desk shorting Spain with everything I got?

Why will a valuable piece of proprietary information be made public? If you wait for a rating agency to make its pronouncement before you make your move, you have already lost the opportunity to make money. Try making money by shorting Spain now! Conversely, if you had money in Spain and did nothing while waiting for the downgrade, I am sorry, but you have probably already lost a pretty bundle.

 

[mahakavi]

I still stand by my belief that the output of rating agencies is absolute hokum, as far as being financially useful. And I have a simple way of proving that.

Suppose I work on Wall St and I happen to have this great insight (before everybody else) that Spain is going to crash. Will I go shouting from the rooftops crying wolf? Or will I be busy at my desk shorting Spain with everything I got?

Why will a valuable piece of proprietary information be made public? If you wait for a rating agency to make its pronouncement before you make your move, you have already lost the opportunity to make money. Try making money by shorting Spain now! Conversely, if you had money in Spain and did nothing while waiting for the downgrade, I am sorry, but you have probably already lost a pretty bundle.

I think there is some confusion here in assessing the situation. When you say insight are you clairvoyant that nobody else is? Most people act on their guesswork--right or wrong. Your guesswork may land you in trouble. Look at what happened in J P Morgan at the London office. They were betting against the market (shorting) and the market turned around and bit them resulting in a loss of $2 billion at the minimum and a lot more that will become obvious soon.

The rating agency's analysis is meant for public. Funds and insurance companies pay for such analyses. The rating agencies develop extensive reports in return for fees for the same. Now that is not inside information or proprietary in the sense the person who receives it may make a killing by trading such securities. The overall rating is made public. That can generate lots of activities in that particular security. Remember the rating downgrade is not an instantaneous death sentence. Some people will sell the security, others will hold in the hope of things turning around, and some others will do bottom feeding. When a bond is selling at 10 cents on the dollar those who buy it at that price may stand to benefit in a lawsuit or any settlement that occurs. As everyone knows the stock market and the bond market are just gambling places. There is nothing guaranteed. Even in a disastrous situation there is money to be made if you know how. Also remember the traders/investors are taking each other's money.

As for Spain the damage has been done and there is nothing to gain for the ordinary investor by shorting now. The game is over. They will default and any salvage operations might be just a trifle. The ordinary citizen/investor does not know anything about a company's or country's bond until the media expose the problems and the rating agency evaluates it. It is not a simple short or long situation as you make it out to be. It is a lot more complex. Without the rating agencies you are in the dark. The rating agencies do not cause the collapse of a country. They only call it for what it is. It is like a reference that you get for a job. The institution hiring you examines it very carefully.

 

[biswa]

So you think the rating agencies output is not guesswork? Ha ha, that is a good one.

Do you know how they defend against lawsuits or when dragged before the US senate? They explicitly declare that their ratings make no representation of material value, they are just opinions: protected by the first amendment.

Just like that, I have an opinion about their opinion: hokum. If anybody else believes otherwise, I hope you have held on to your AAA rated mortgage backed securities from 2008.

 

[mahakavi]

Of course the report by the rating agencies is an opinion but they come to their conclusion after extensive analysis of the financial facts against the political backdrop. Sure, despite their analysis things can turn around against their conclusion. That is why they protect themselves claiming protection under first amendment. The people who buy such reports are well aware of it. It is like when you go into the hospital for a surgery (major or minor) you sign a declaration that you won't hold the operating team responsible for the outcome if it is bad. They also assure you it is all a routine. Will you walk away without the surgery? It is the same situation. Very rarely things go wrong and at that time you or your representatives can and will sue for malpractice despite the declaration you signed. It is the same situation with the rating agencies. Despite their recommendation some folks will act against that taking a risk, as I mentioned before. They might make a killing or lose their shirt. It is all a guessing game.

Now why do you think the entire institutional investing community relies on these reports? Nobody as an individual has the resources to analyze all the facts.Why do we all go to universities and take courses and graduate---just to learn from the experts, right? Of course a handful of people may skip schooling and turn out to become experts themselves. The average John Doe cannot take that route.

Regarding rating when they rate AAA in the year 2008 they did so based on info available at that time. But the financial crisis turned everything topsy-turvy. Kodak was rated AAA years ago but the digital cameras did them in and the rating fell into the netherworld. So you don't rely on that rating of eons ago and go to sleep. You have got to be vigilant.

 

[Iyyarooraan]

Thank you Mr Mahakavi Sir. Japan was proud of its orient wisdom and thus confronted the US at Pearl Harbour. Consequence was brutal holocaust. America wanted to make amends and Japan had no alternative. It is a long story and every country can boast of intelligent and visionary people to bring up on their own. America's attempts have been to beat them in this. Well I am also the one to think that America is great in so many things, but not in world politics. I do not think it proper to talk their local politics.

As for the rating agencies, let me put it in nutshell. They may be functioning independently but I suspect that they are like the clans of CA worldover including India. It will take years to accept here that we imported all these problems. Though we have bad people at the head we are capable of coming up on our own - so much intelligence is spread over the length and breadth of India.

 

[mahakavi]

Mr. Iyyarooraan:
I am not saying whatever the US does is right. In this day might is right--whether it is economic or military. But then again might can become blind or be misled through arrogance. Hence the missteps by the US at several fronts. But remember one thing. America is one country now but was built up by multiple nationalities. That is where the US has its strength. The country values individual enterprise and inherent merit. So anyone (does not matter what race or religion) who accomplishes a lot will be honored here. Even Europeans, let alone Asians, hate American dominance in the world. But nobody should forget that America saved Europe from the clutches of Hitler. When the former French president deGaulle wanted America out of France, the American Secretary of State (foreign minister) asked him "do you want all those buried in your land also out of the country?" The reference was to the thousands and thousands of American soldiers who died on the beaches of Omaha and Normandy during WWII while trying to save France from the clutches of Hitler. deGaulle was tongue-tied. Every country has its good and bad aspects. இயற்கையின் நியதி, I guess.

Any country which has business outfits which rely on the general public for funding their operation (via issue of stock) has to have a system of checks and balances and general accounting has to be standardized. It does not mean it has to be the same all over the world. But if you operate on the world scene you have to have common standards. Since America has been a leader in global operations for a long time their standards have been adopted the world over. If Infosys or Wipro or Tata Consulting want to serve the business interests of the US companies, they have got to follow the US standards. Every company can examine the functioning of the other company with which they deal only through such standardized practices. When foreign investment pours into India (through the stock market) they go through the analytical reports before investing. As I said before if the reports turn negative these funds can wreak havoc in the stock market by virtue of their financial might. Unfortunately the locals might get into the market when these foreign funds keep pouring money making the market go up. These funds follow the rating agencies' reports and act accordingly. The locals will be left holding the bag when the funds drain money out of the market.

I am not at all discounting that merit exists within the country in India. But at this time it plays a secondary role especially when the politicos are wreaking havoc. These politicos have no scruple about the country when they serve their own interests.

 

[Iyyarooraan]

I agree that America has predominance in world affairs particularly in economics and security. It is this predominance that influence their policies over others. We know what it did in Viet Nam and Iraq. America has ruined Pakistan though it has not helped us. It wanted to do some adventures in the east. It is preparing ground for Iran. America has investments from Jews, Opec, Russia, Japan and China. Thankfully India is a drawing country. In the circumstances, as has always been, money power will rule there. Again that money-power has security from military might. It is this situation that should cause worry to other nations. Today India may be less vulnerable but vulnerable all the same. When we can show that we can manage ourselves, it will help us and help America, too, both being democracies. We are rallying behind the US but in the process should not lose our identity. We all know America respects might.

 

[mahakavi]

I agree that America has predominance in world affairs particularly in economics and security. It is this predominance that influence their policies over others.

Isn't that true throughout mankind's history? தடி எடுத்தவன் தண்டல்காரன். In the old days the muslim invaders from the west invaded India and caused mayhem and murder. They occupied Delhi. Then they came down south and destroyed Indian culture, and religion including temples. Then the British came and subjugated an entire country which had its glory days before and after the common era. Even in the early centuries of the common era one king fought with other king(s) and expanded his empire. History did not record all the atrocities in those adventures. Even in the southern kingdoms there were invasions and subjugation. What we see now is nothing new. Formerly it was quite a bit localized venturing not more than a few hundred miles. Now it is happening over several thousand miles apart.

America botched their adventure in Vietnam by supporting a dictator. Likewise in South America they destroyed several countries (Argentina, Chile) and several in Central America by aligning themselves with dictators. But after 9/11 you cannot accuse them of misadventures. In the 9/11 citizens from various countries around the world were killed. No self-respecting nation would keep quiet after that. Afghanistan is a consequence of that. Iraq was rather unfortunate but was Sadaam Hussein doing the right thing for the citizens of Iraq? As for Pakistan, they exploited the US economically drawing huge sums year after year. Now they are facing the music. That nation deserves their predicament since they acted like பாலுக்கும் காவல் பூனைக்கும் தோழன்.

India has acted with composure and self-respect in recent times. You have to be very diplomatic these days. Just because the US may act contrary to some its values, India cannot castigate the US. They can express their disagreement without antagonizing. For example the US blacklisted several countries including China recently targeting them for sanctions for trading with Iran in the face of UN sanctions. India has been and still is buying oil from Iran but with appropriate reasoning the US has exempted India from such sanction. So there is a lesson on how to handle delicate issues. Even the nuclear program cooperation has been handled very effectively. Overall money and military power prevail. The only way to counter it, if at all, is by working around the edges.

 

[prasad1]

Diplomacy is walking on knife's edge, one wrong move and you get cut badly.
India has been playing this game very smart and with India alone on its mind. I like the comments Mr. Mahakavi in post#18.
That is the way to play the game.

 

[biswa]

I actually see a lot of positive opinion about India in the American press. Some say India is the only friend the US has in Asia (aside from Israel of course).

On a lighter note, I heard this: it is not the S&P (Standard & Poor's) which has downgraded India. It is the S&P (Sonia & Pranab)!

 

[mahakavi]

I actually see a lot of positive opinion about India in the American press. Some say India is the only friend the US has in Asia (aside from Israel of course).............

Many times Israel bites the hand it feeds from! பாம்புக்குப் பால் வார்த்த கதை!:nono:

 

[biswa]

Israel is in a class of its own (specially under Bibi) . I would so like to see a fight between Israel and China.

 

[mahakavi]

Israel is in a class of its own (specially under Bibi) . I would so like to see a fight between Israel and China.

China is out of reach by land, sea or air for Israel. Israel's missile range cannot even stretch beyond Iran nor their airforce fly beyond that distance without requiring mid-air refueling. US would not let Israel even to ponder that possibility.

 

[Iyyarooraan]

Israel is in a class of its own (specially under Bibi) . I would so like to see a fight between Israel and China.

What for? Do you think India cannot fight China? Israel will always try to save itself.

 

[sudeshwer]

And, we promote FM to President. well done. of course, when S&P downgraded USA, neither its President nor his Treasury Secretary resigned.