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Intolerance for the upgrade

‘Public mood’ and rating rationale are independent of each other, writes K Raveendran.

Intolerance for the upgrade

There are several instances in the past when rating agencies faced the flak for their downgrades, with the victim sovereigns or companies questioning them on their conclusions and blaming them for lack of understanding and arbitrariness. It is perhaps for the first time that an agency has been criticised for an upgrade, as it happened with Moody's revision of India's investment grade.

Moody's recently raised India's rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook from positive to stable, attributing the improvement to the Modi government's reform initiatives such as demonetisation, the goods and services tax (GST) and its efforts to resolve the bad debt crisis of banks. Coming as it is after the recent jump in the World Bank's Ease of Doing Business index by some 30 points, the Modi government went to town, as expected, portraying the upgrade as the strongest endorsement of demonetisation and GST, which have been under fire from the Opposition as well as a section in Modi's own party.
The Congress has criticised Moody's action as not being in sync with the public mood in India. "Contrast the mood at Moody's with the mood of the people. While you bask in their upgrade worry about livelihood millions have lost," former minister Kapil Sibal tweeted. He was joined by others such as Chidambaram and Manmohan Singh, who advised caution about overconfidence on the ratings impact.
With all-important elections around the corner, the Congress discomfort with the timing of the Moody's pronouncement is understandable. But the argument that the Moody's move is at variance with the prevailing public mood is not tenable, as rating decisions are hardly based on public perception. The stability of a government and its support from the people are indeed important factors for investors when assessing their risks as these boost their 'animal spirit', but rating actions are based on parameters that have deeper impact on the performance of a government over medium to long term. The Opposition can claim some consolation prize in that Standard & Poor's, another equally important agency, has kept India's rating at the old level, showing little enthusiasm for Moody's findings.
Certain other approaches to the upgrade, for instance, by CPI-M general secretary Sitaram Yechury, are also off the mark. According to Yechury, the rating upgrade signified the 'beneficial atmosphere for the international capitalist groups' under the Narendra Modi regime. He also cited the deterioration in all aspects related to human welfare and human rights. While both these are important issues by themselves, mixing up the two confuses and complicates the subject. Ratings upgrade really enables companies to access capital at lower costs. GDP growth, similarly, goes a long way in creating a beneficial atmosphere for the capitalists, but that doesn't mean GDP growth is bad.
Rating agencies have often come under a cloud, mostly for their rating downgrades. Former European Commission president Jose Manuel Barroso had called for the 'oligopoly' of the rating agencies to be broken when the euro-zone debt crisis threatened to spiral out of control after the ratings of the countries embroiled in the turmoil were downgraded by the agencies.
Dubai had once questioned the action by S&P when it revoked the credit rating of Dubai Holding Commercial Operations Group (DHCOG) after downgrading it from 'BB plus' to 'B', or five levels below junk bond status, because of a lack of information about the group. The Dubai government company, the property and hospitality subsidiary of Dubai Holding, a conglomerate closely held by the Dubai government and which owned such landmarks as the iconic Burj Al Arab hotel, said that the rating agency was wrong.
Dubai criticised the agency's 'lack of understanding' of the company's business, its operations and relationship with the government of Dubai. S&P said that it was withdrawing the rating due to 'inadequate timeliness of information and insufficient documentation' provided by the group to maintain its surveillance. The ratings agency did not elaborate on the nature of the information it was lacking, but the group defended itself and pledged to 'work closely with other rating agencies and directly with investors in full transparency'.
The company said that although it has been engaging with the agency and sharing adequate information frequently and in a transparent manner, S&P 'issued inaccurate statements coupled with factual errors that are misleading'.
In a first of its kind case, the United States Justice Department had sued S&P in 2013, seeking $5 billion and accusing the ratings agency of defrauding investors over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis. S&P argued that its ratings were protected under the right to free speech, and described the lawsuit as retaliation for the firm downgrading the credit rating of the United States. The agency finally reached a $1.5 billion deal to settle the case.
But none of these is similar to the Moody's ratings upgrade of India, which is, by all means, credit positive. In any case, the action by S&P of maintaining the rating at the lowest level of investment grade must not please any patriotic Indian, even if it would seem to strengthen the argument against the Modi government.
(The views are strictly personal.)

K Raveendran

K Raveendran

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