Modi Government Running After Moody Ratings

In a move, which Media is portraying as a boost to the present BJP government, Moody’s Investors Service - one of the world’s big three credit rating agencies - has upgraded the ratings of India’s sovereign debt by one grade from Baa3 to Baa2.

What do these higher ratings mean for India, financially?

Upgrading of the ratings would theoretically make it cheaper for Indian government to borrow in foreign currency. But, considering that about 96% of India’s government debt was borrowed within India in rupees - availability of slightly cheaper foreign loans makes a little difference to the government finances. Moreover, with the Reserve Bank sitting on foreign exchange reserves close to $ 400 billion, Indian government hardly needs to look outside it’s borders for any foreign currency borrowings.

The irrelevance of these ratings to India seems lost on the BJP. It’s top leaders immediately latched on to the rating upgradation, to shower praises on their dear leader. Amit Shah has declared that Moody’s ratings have vindicated Mr. Modi’s good work as India’s PM. Mr. Jaitley hailed the ratings, saying that “it was an evidence of the unparalleled good work done by the Narendra Modi led government”.

As revealed by Reuters in 2016 – even since the BJP government came in to power, it has been begging the Moody’s rating agency, for improved credit ratings. The finance ministry under Mr. Jaitley has been showering the rating agency with letter and emails containing appeals for higher credit ratings. Moody’s pervious has rejected government’s appeals, stating that not enough is being done to encourage investment climate and to curtail the fiscal deficit.

Yet after one year, Moody’s obviously felt Indian government has done better, enough to warrant a higher rating. What happened in this one year, that suddenly made Moody’s more optimistic about India?

Well, Demonetisation and the GST have happened in this one year. Most Indians who suffered through these two disasters would have thought that the government would be downgraded, instead of being upgraded, for its misadventures.

Evidently, Moody’s works on a different logic than an ordinary Indian. On it’s website, the agency lists the reasons why it has decided to upgrade India’s credit ratings. One of the reasons it states is demonetisation, which accord to Moody’s is going to increase the formal sector in the economy. The destruction that demonetisation wrought in in India’s informal sector, which employs majority of India’s work force, is no-doubt a bright prospect for the Indian and foreign corporate groups which are part of the so called formal sector. And, Moody’s clearly recognises this.

Apart from showing its appreciation for demonetisation, Moody’s also takes time to acknowledge the importance of Aadhar based biometric system in reducing the share of the informal sector and, by implication, help the players in the formal sector.

The lakhs of workers who congregated in protest, in Delhi recently, may not like the labour reforms proposed by the government. The workers might think that these reforms are meant to trample on their already meagre rights and push down their wages even further – but Moody’s knows better. It views these reforms as an important move by the government to make India attractive for foreign investors, not matter what it will do to the 400 million Indian workers.

Modi government’s plan to cut back on public distribution system (PDS), cooking gas subsidies and other public welfare programmes - through targeting and the so called Direct Benefits Transfer, also received their fair share of praise from Moody’s. According to the ratings agency, this move shows government’s commitment to reducing fiscal deficit.

If there is anything, that keeps the bosses of the ratings agencies awake at night - it is the fiscal deficit of the governments. It does not matter that the majority of Indians are living in poverty or that millions of children are suffer malnutrition due to lack of government intervention. As long as the government does not spend on the welfare of its people, rating agencies like Moody’s are satisfied enough to hand out good grades to the Modi government.

Who cares about Moody’s ratings?

Any self-respecting Indian may ask, why should the government of Independent India worry about what a foreign private financial agency, thinks of it. Have we fought for our independence from the East India company and the colonial rule, only to be afraid of what foreign credit agencies, which are reviled in their own home countries, think of us.

If Mr. Modi and Mr. Jaitley jog down their memories lane to the 2008 financial crisis, they will remember that a large part of the blame for the crisis lands on the shoulders of these foreign rating agencies, foremost of which was the Moody’s agency.

These rating agencies took lucrative fees from the investment banks, to give high AAA ratings to the junk mortgage backed securities sold by the banks. Unsuspecting investors, placed their trust on these agencies and bought the toxic junk. Those who placed their trust on the ratings of these agencies included many pensions funds, in to which many Americans put their life savings meant for old age. They ended up losing all during this crisis. For its culpability in the crisis, Moody’s was forced to cough up $864 million in penalties in USA.

This is the agency, whose ratings Mr. Modi is wearing as a badge of honour today. Talk of twisted priorities! He seems to be forgetting that he was elected to serve the interests 132 Crores Indians, not those of foreign businesses and financial companies.