Rating agencies’ rant on Arun Jaitley’s fiscal roadmap delays is uncalled for

Merely days after Finance Minister Arun Jaitley announced that he would be delaying the fiscal roadmap of achieving fiscal deficit at 3% of Gross Domestic Product (GDP) by an year, global ratings agencies came down hard upon the government. 

The big three – Standard & Poor’s, Fitch, and Moody’s – criticised the decision to achieve the fiscal deficit target of 3 per cent by 2017-18 instead of 2016-17 as envisaged earlier. They were also critical of the 2015-16 target of 3.9% of GDP, as compared to 3.6% assumed in the existing roadmap. 

Essentially what they meant was this: The Budget is unlikely to have a positive outcome on India’s sovereign credit rating. S&P went as far as ruling out a rating upgrade for at least an year. Fitch said that while announcements on structural reforms and increased public spending in infrastructure were positive, the “less aspiring” fiscal consolidation strategy was negative for ratings. 

These criticisms were on the expected lines, but were they justified? In a word, NO. 

These agencies’ comments, outlook and ratings on various government and corporate securities are keenly followed by investors around the world. And in most cases, they can be treated as the final word for any security, thus affecting investment decision across markets and asset classes. In fact, a large number of debt funds and money managers are required to invest only in instruments with an investment grade rating and above. 

The agencies, and especially the Big Three, have justifiably been making a case for India to come up with, and follow, a fiscal consolidation roadmap in order for the country to bridge the sometimes yawning gap between its revenue resources and expenditure plans. 

They have often threatened a ratings and outlook downgrade. Successive administrations and finance ministers have paid heed and tried to get their finances in order, fearing a flight of foreign capital. That is because these agencies were right to a big extent. 

Why do I think they are just being stubborn now? Simple enough, Jaitley may have delayed the roadmap, but in doing so he has actually shown intent to fix the nation’s fiscal gap. He admitted that Finance Commission recommendations to increase states’ share of the divisible pool by 10% would make it difficult for the government to meet its fiscal obligations. He admitted that he needed more time to cut the fiscal deficit to 3%, and revenue deficit to zero per cent of GDP. 

His predecessors met their yearly deficit targets all right, ensuring that the ratings agencies, and the people of India through Parliament, were satisfied. But that was by slashing spending across the board, in key economic and social sector programs. Here is Jaitley’s chance to ensure that there are no massive capital spending cuts at the end of any financial year and that there are no accounting smokes-and-mirrors. 

Finance Ministry officials, including Finance Secretary Rajiv Mehrishi, and Chief Economic Advisor Arvind Subramanian, will start meeting representatives from rating agencies soon, starting with Fitch on March 12. They will surely press for a ratings upgrade. While that is a far-fetched hope, here’s wishing that the agencies do consider North Block’s views. 

Until then, their criticism of the fiscal consolidation roadmap seemed like an uninformed call. These agencies have a lot of credibility, but then again, they have taken wrong calls from time to time. After all, they gave positive ratings to the likes of Lehman Brothers and AIG, as well as to the mortgage-backed securities that led to the 2008 global financial meltdown right up until the collapse of the former. 

(Arup Roychoudhury covers the economy and policy for Business Standard)