Premature pessimism

Moody’s was wrong about East Asia and could be wrong about India too. But right or wrong, international credit rating agencies wield considerable influence on investment decisions around the world. So, Moody’s announcement that it is reviewing India’s sovereign rating for a possible downgrade is bound to reinforce negative assessments of the economy. In as far as Moody’s premature pessimism slows down foreign investment, raises the cost of foreign borrowing and transmits more turbulence through the foreign exchange and stock markets, it would serve as a self-fulfilling prophecy. Thus by the time the review is completed and the revised rating announced, Moody’s might just turn out to be right about India. That is exactly the sort of role rating agencies should not perform. There are more than enough Cassandras when things start to go wrong in a country’s economy and plenty of drum-beaters when things are looking up. Both manage to exaggerate the effects by their noise. Agencies like Moody’s Investor Services and Standard and Poor’s are supposed to be made of different, sterner stuff and to be able to stand apart from the herd as they rush into one market pumping up the indices and out again leaving devastation behind.

Because it is impossible to be infallible, it is necessary to avoid contributing to underlying psychological trends. However, in the midst of the beating East Asia is taking, pessimism appears to have become a safe haven for rating agencies who were unduly upbeat about the tigers well into 1997. Having been proved disastrously wrong there, who wants to take any more chances on Asia? Investors will complain when investments turn sour but would find it more difficult to complain about lost opportunities. It should be obvious that no two emerging markets are the same in Asia or elsewhere. To arrive at any kind of firm assessment on India at this stage is jumping the gun. True many Indian analysts themselves worry about macroeconomic trends, sluggish industrial growth and weaknesses in the financial system. But Moody’s has put too much dark emphasis on some factors like the current account deficit and taken insufficient notice of the public sector debt profile. In any case, useful judgement on other factors such as the domestic political scenario and the reform policy climate must be reserved at least until the elections produce an outcome. It is too early to draw conclusions about the impact of the East Asian crisis on Indian policy-makers. For every Gujral who says slowly, slowly, there is a Chidambaram insisting that globalisation holds no terrors for this country.

One lesson large investors are drawing from East Asia is that all the important economy-watchers, from the World Bank to the rating agencies went comprehensively wrong and some like the IMF are still doing so. Many investors will, therefore, be inclined to rely more on their own analysis. New Delhi should improve the quality of the economic data it puts out and make more of it available more frequently. That is one way to counter negativepublicity. Meanwhile political party headquarters would do well to remember the world is looking for clarity and coherence on policy issues.