Moody’s Upgrades India’s Sovereign Rating: What Does it Really Mean?

Neeraj Jain

On November 17, 2017, international rating agency Moody’s on Friday upgraded India’s sovereign bond rating by two notches to Baa2 Stable from its lowest investment grade Baa3 Positive. This was the first ratings upgrade by Moody’s for India since 2004.

Let us first explain these ratings, before going ahead with our analysis. The various ratings of Moody’s are: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. Aaa is the highest rating, and it means ‘Highest quality, lowest risk.’ C is the lowest, defined as ‘Typically in default, with little possibility of recovery of principal and interest’. The category Baa that Moody’s has given to India means ‘Medium grade, moderate credit risk, speculative characteristics’. Attached to all these categories are one of three numeric codes 1,2 and 3, which stand for stand for ‘high’, ‘medium’ and ‘low’ respectively. And attached to each numeric code are one of the three categories: Positive, Stable and Weak. Thus, when Moody’s upgraded India’s rating from Baa3 Positive to Baa2 Stable, it is an upgradation by two notches: Baa3 Positive to Baa2 Weak to Baa2 Stable.

What does this upgradation mean? It basically means that Moody’s has given the thumbs up for foreign investors to increase their investments in India. Why? According to newspaper reports, Moody’s cited the BJP government’s ‘wide-ranging program of economic and institutional reforms’ for this ratings upgrade. These include:

·         its efforts to reduce corruption, formalise economic activity and improve tax collection and administration, including through demonetisation and GST

·         its efforts to reduce its expenditures, including through measures like targeted delivery of benefits through the Direct Benefit Transfer (DBT) system

·         measures such as Aadhaar

·         the measures taken by it to address non-performing loans in the banking system

·         the fast pace of growth in incomes etc.

It further added that if the government took steps to further reduce its expenditures, and implemented key pending reforms, including land and labour reforms, that would help India further upgrade its sovereign rating.[1]

This news made the headlines in almost all newspapers. Finance Minister Jaitley immediately termed this as a “belated recognition of all the positive steps taken in India in last few years.” He went on to say, “it is a recognition and an endorsement of the reform process that has gone on in India particularly in last 3-4 years where a number of structural reforms have taken place which has placed India on a path of high trajectory growth. It’s also a recognition of the fact that India continues to follow a path of fiscal prudence that has brought stability to the Indian economy.” He further added: “If you look at the big picture for three years in a row India is the fastest growing amongst the major economies. India is one of the few economies undertaking structural reforms. I’m sure that many who had doubts in their minds about India’s reform process would now seriously introspect on their own positions itself.”

The PMO tweeted “Moody’s believes that the @narendramodi Government’s reforms will improve business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth.”[2]

This upgrade giving a thumbs up to the performance of the economy comes at a strange time, just when all the economic indicators show that the economy is performing terribly, with no signs of improvement in the near future. A few statistics.

India: External Accounts

Our external accounts were never in a worse state:

1.    Our external debt crossed $485 billion in June 2017, making India one of the world’s most indebted countries.[3] The Indian economy has become totally dependent on foreign capital inflows, including both foreign direct investment inflows and speculative capital inflows, to stay afloat. All the glib talk about our large foreign exchange reserves is meaningless; as we have shown elsewhere, our foreign exchange reserves are much less than our ‘vulnerable external liabilities’ (foreign capital that has come into the country that can leave the country very quickly).[4] This means that if foreign investors decide to pull out their money from India—which they can do at the tap of a computer key— our foreign exchange reserves are simply insufficient to prevent the economy from once again plunging into foreign exchange bankruptcy, similar to what happened in 1990-91.

2.    In financial year 2017-18, our external accounts situation is getting worse. During the first quarter of this year, India’s current account deficit (CAD) rose to a four-year high of $14.3 billion. Our trade deficit for the first six months of this year zoomed by a whopping 166% to $43.8 billion as compared to $16.5 billion in April-September 2016.[5]

Economy Heading Into Recession

1.    The economy is slowing down. Official data show that the India’s GDP or gross domestic product slowed down to 5.7% on a year-on-year basis during the April-June quarter of 2017-18. More significantly, this was the sixth consecutive quarter for which the GDP growth has slowed down. It had touched a high of 9.1% in January-March 2016 quarter. After that it has continuously slowed down, to 7.9%, 7.5%, 7.0% and 6.1% in the subsequent quarters, to 5.7% in Q1 of 2017-18.[6]

2.    One may argue that even this growth rate of 5.7% is not bad, but in all probability, even this is a huge overestimate. That is because this quarterly data is largely based on data provided by the corporate sector and some other organised sectors of the economy. It does not include data from the unorganised sectors of the economy, which contributes to 45% of the GDP. This sector was hit hard by demonetisation and now the government decision to roll-in GST. While there are no official surveys that capture the extent to which this sector was hit by demonetisation, private surveys indicate that that this sector was badly affected, by as much as 60-80%. It also led to a huge increase in unemployment, as more than 92% of our workforce is employed in the unorganised sector. Basing himself on data provided by these private surveys, the noted economist Prof. Arun Kumar argues that it is possible that the GDP growth rate has actually fallen to way below 5.7%, and in all probability is near-zero.[7]

3.    The drastic slowdown in the economy is also indicated by the collapse in credit off-take. Low credit off-take suggests that production and investment has slowed down. Credit offtake was already at a whopping six-decade low of 5.08 per cent during the financial year 2016-17. It in fact turned negative in July and August 2017, something that has never happened before.[8]

4.    The Index of Industrial Production, a measure of India’s factory output, turned negative (-0.1%) in June 2017, the first time it has happened in the past four years. The IIP growth for the first quarter of 2018 (April-June) was only 2%, the lowest in the past eight quarters.[9]

5.    The Modi Government has waived bank loans given to the rich in record amounts. It has written writing off bank loans to corporate houses and the rich to the tune of a mind-boggling Rs 1.87 lakh crore during its three years in power. On top of it, has also restructured loans to the rich whose total amount may even be more than this loan write-off figure.[10] And yet, Indian bank’s bad loans climbed to an astounding Rs 9.5 lakh crore by the end of June 2017.[11]

Those were broad economic indicators. So far as the people are concerned, the situation has never been more worse:

Terrible Unemployment Situation

1.    The overwhelming number of jobs in the economy, nearly 93%, continue to be in the informal sector, characterised by low wages, no job security and no social security benefits. And this has been so for the past more than two decades. The Planning Commission admits that during the decade 2000-10, the economy created no formal jobs, in fact the total number of formal sector jobs actually declined in absolute terms![12]

2.    The actual employment situation is far worse than suggested by the above figures, as economy is simply not creating jobs for all the new entrants into the job market, even in the informal sector. Total number of people entering the job market is estimated to be 13 million per year.[13] Official figures indicate that barely 40% of the new entrants into the job market are getting jobs. Barely 85.8 million got jobs during the period 1993-94 to 2009-10.[14]

3.    This situation has further worsened under Modi rule. The quarterly surveys carried out by the Labour Bureau of selected labour intensive organised sectors finds that employment generation in 2016 had fallen to just 25% of the jobs generated during 2009-11.[15] A more recent study says that there was an absolute decline in employment during the first two years of the Modi Government (2014-16), possibly the first time this has happened since independence.[16]

Appalling Poverty Levels

India’s poverty levels are appalling. The Government of India claims that that poverty levels in the country have fallen from 37.2 percent in 2004–05 to 29.8 percent in 2009–10, and then within two years to 21.9% in 2011-12![17] A closer look reveals their trickery: the Planning Commission has deliberately lowered India’s poverty line to the shamelessly low level of Rs 27.2 per day in rural areas and Rs 33.3 per day in urban areas (for 2011-12).[18] In other words, our poverty line does not measure poverty, but destitution. Basing herself on the original definition of poverty line accepted by India’s Planning Commission in the 1970s, wherein all people unable to access 2200 / 2100 calories per day in rural / urban areas are considered poor, the noted economist Utsa Patnaik has made estimates of the number of people in the country who are living below this poverty line using data from the NSSO surveys of 2004–05 and 2009–10. Her estimates show that:

·     In 2004–05, the percentage of people in rural India unable to access 2,200 calories was 69.5 percent; this percentage had gone up to an appalling 75.5 percent in 2009–10!

·     64.5 percent of the urban population was unable to reach 2,100 calories energy intake in 2004–05; this figure too had gone up to 73 percent in 2009–10![19]

To most people fed on a daily diet of media propaganda that India is rapidly growing and is an emerging superpower, these figures would appear to be an exaggeration. But these distressing figures are borne out by other surveys too:

a.    The National Commission for Enterprises in the Unorganised Sector (NCEUS), established in 2004, estimated that 77 percent Indians lived below Rs 20 a day. This figure is in fact more than Utsa Patnaik’s estimates for poverty in 2004–05.[20]

b.    India is one of the world’s worst performing countries in providing its citizens two square meals a day. The Global Hunger Index, a report published by the International Food Policy Research Institute, ranked India at 100 out of 119 countries in its latest report released in 2017.[21]

c.     Data from the National Family Health Survey–4 (2015–16) show that 38.4 percent of children under the age of five suffer from chronic malnutrition, because of which their growth is stunted (low height for age).[22]

Analysing Moody’s Upgradation of the Indian Economy

If the economy is in such terrible state, then why is Moody’s praising the Modi Government and has upgraded India’s rating?

The truth is, Moody’s is not at all concerned about the state of Indian economy, it has not upgraded India’s rating because it is doing well – which it is not, as all the above facts testify. The real reason why Moody’s has given the thumbs up to Modi Government’s economic policies is because it is continuing with the policies of globalisation–liberalisation–privatisation that have been implemented in the country for the last more than two decades. These policies are being implemented at the behest of the governments of the developed countries led by the USA, and the international financial institutions controlled by them, the World Bank and the International Monetary Fund (or IMF). The reason why successive Indian Government’s at the Centre have been dutifully implementing their dictates since 1991 is because of our huge foreign debt, which under the Modi Government has now topped $485 billion. (Discussing this issue in greater detail is beyond the scope of this article.)[23] The objective of these economic reforms is to remould the Indian economy and allow big corporations—both foreign and Indian—to acquire decisive control over it so that they can maximise their profits.

This can be easily understand by taking a look at Modi’s policy of demonetisation that has been praised by Moody’s. No one who knows anything about economics will praise demonetisation. Yet, Moody’s praises the Modi Government for this, saying that it was a serious effort to reduce corruption and formalise economic activity. As we have discussed elsewhere,[24] demonetisation was not an attack on corruption, that is just a lot of hot air. Where Moody’s is right is in stating that it was a serious effort to formalise the economy. Demonetisation was indeed an attack on India’s vast informal sector. The three biggest components of India’s vast unorganised or informal sector are:

  i.          Agricultural sector, on which 53% of the population depend for their livelihoods;

 ii.          Small-scale or unorganised retail sector, which accounts for around 9% of total employment;

iii.          Small-scale or unorganised manufacturing sector, which accounts for 7.5% of total employment.

Why does Moody’s want the government of India to attack this vitally important sector that provides 93% of the employment in the country and contributes nearly 50% of the GDP. The reason is, the big corporations stand to benefit. The foreign and big Indian corporations are interested in destroying India’s informal sector and corporatising the Indian economy because it will give a further boost to their profits. Thus, for example, the big shopping malls will obviously want to destroy India’s small scale retail sector so that all Indians will be forced to go to the malls to buy their needs. Likewise, agribusiness corporations want to destroy India’s small farmers so that they can take over their lands and corporatise Indian agriculture. India’s informal sector was already struggling for survival under the neoliberal economic reforms being implemented in the country since 1991 in the name of globalisation. Now, in the name of demonetisation and cashless economy, the Modi Government has launched yet another offensive to further cripple it. No wonder that Moody’s is full of praise for it.

The unfortunate truth is, Modi-Jaitley are implementing the World Bank dictated neoliberal policies at an even faster pace than the previous UPA Government. This is the real reason for Moody’s upgrading India’s sovereign rating. We give a few more examples.

1.    In 2015-16, the new BJP government twice announced huge liberalisation of foreign direct investment (FDI) rules for foreign investors, and proudly declared that these reforms have made the country the most open in the world. It has gone to the extent of permitting FDI even in defence. It does not matter to Moody’s that the more the FDI inflows, the more the profit outflows, which push the economic into deeper external debt crisis.

2.    Ever since India began globalisation in 1991, foreign financial corporations have been demanding that the Indian Government end its control over the country’s financial sector, in other words, privatise it, and allow foreign investors to enter and take it over. The BJP Government has taken several steps in this direction, including getting the Insurance Laws Amendment Bill passed by Parliament to increase FDI inflows into the insurance sector, and setting up the Banking Boards Bureau as an important step towards eventual privatisation of the banking sector, and gradually privatising the pension funds. That these steps will endanger the lakhs of crores of rupees of savings of the people that are deposited in these public sector financial institutions, and will be devastating for the Indian economy in the long run, is of no consequence for Moody’s; all that matters is the present profits of foreign investors.[25]

3.    The Modi Government is diligently implementing yet another policy demanded by India’s foreign investors, that it reduce the fiscal deficit. Now, for an economy like India, a high fiscal deficit is actually good for the economy. The theory, that high levels of fiscal deficit relative to GDP will adversely impact growth, is humbug. John Maynard Keynes, one of the greatest economists of the 20th century, had debunked it long ago. He had argued that in an economy where there is poverty and unemployment, the government can, and in fact should, expand public works and generate employment by borrowing, that is, enlarging the fiscal deficit; such government expenditure would also stimulate private expenditure through the ‘multiplier’ effect. All developed countries, when faced with recessionary conditions, have implemented Keynesian economic principles and resorted to high levels of public spending and high fiscal deficits.[26] Then why do Moody’s and the big foreign investors want the Indian Government to reduce its fiscal deficit?

Well, the truth is, they are not really concerned about the fiscal deficit. This can be explained by a simple argument. The fiscal deficit is the excess of the government’s expenditures over receipts. Even a cursory look at the policies being pursued by the Government of India reveals that it is giving away lakh of crore of rupees as subsidies to the rich. Why don’t Moody’s and the foreign corporations demand that the government reduce these huge give-aways and thereby reduce the fiscal deficit? But in the new economic lexicon of these foreign scoundrels, these concessions are called ‘incentives’ and are considered essential for ‘growth’. Note that Moody’s has no problems with the government writing off bad loans of public sector banks, it in fact has praised this. Then why are they pressing the Government of India to reduce its fiscal deficit? The real reason is: they want the Indian Government to reduce the concessions being given to the poor, which are aimed at making available essential welfare services like education, health, food, transport, electricity, etc. to them at affordable rates. They give these concessions are given the derisive name ‘subsidies’, and are demanding that these be drastically reduced in the name of containing the fiscal deficit. As the quality of these services deteriorates, that gives the government the excuse to privatise them, resulting in fabulous profits for the private sector.

·        This is precisely why Moody’s praises the government’s efforts to implement Direct Benefit Transfer. This, together with Aadhaar, is nothing but a step to reduce government food subsidies and gradually wind up the public distribution system. It will lead to a huge increase in food prices, as the PDS was an important measure to check hoarding of foodgrains and speculation in food prices, and will spell absolute disaster for the millions of impoverished people in the country.[27]  

To conclude, the upgradation of India’s sovereign rating by Moody’s is not an indicator of how well the Indian economy is doing for the people, but is an indicator of how well the economy is doing for profit maximisation of giant foreign and Indian corporations. India is on SALE, and the foreign investors and their ratings agencies are celebrating.