Sometimes, we have to read not the words of powerful people and institutions but the silences. Or we have to interpret the gentle hints that are dropped amid the more noticed words and explanations.
The decision of global credit ratings agency Standard & Poor's this month has plenty that requires reading between the lines. S&P dashed hopes for Prime Minister Narendra Modi's NDA government last week when it stuck to the current sovereign rating for India at BBB (-) with a stable outlook (the lowest investment grade), eliciting a reaction from the government that the agency was unfair in its assessment.
Economic affairs secretary called for "introspection" among the ratings agencies.
Is politics a hidden factor in the assessment? It seems so.
First, the government's upset mood is understandable. Modi can claim reasonably that his NDA government ended the so-called "policy paralysis" seen during the UPA's rule with a slew of measures on everything from coal and spectrum to ease of doing business and then ushering in the goods and services tax (GST). In fact, the government expects to close the current fiscal year ending next 31 March wih a respectably low fiscal deficit of 3.5 percent of the gross domestic product (GDP). Inflation is also close to target levels of 5 percent for the year-end.
So we should not be surprised that the government is surprised in a negative way.
Now, also consider that there were two other surprises in the S&P statement. First, that there will be no review of the rating for another two years, and secondly, that low per-capita income is a concern for the agency. We need to take both into consideration as we try to read between the lines.
The agency welcomed the policy stability and improved monetary credibility (which must be a tribute to the discipline enforced by the recently exited RBI governor Raghuram Rajan and a new monetary policy committee) but also spoke of "weak public finances" apart from the low per-capita income. A pile-up of bad loans among public sector banks remains a big concern as it needs government money to clean up balance sheets.
Low per-capita income may be seen as indicator that the aggregate demand in the economy may not be strong enough to sustain growth, and therefore, tax revenues, and hence the underpinnings are weak. Or worse still, that low income means a potential political problem because this may give rise to social unrest.
Officially, rating agencies like S&P do not talk much of politics -- or are not supposed to -- but politics is always there in the backroom conversations. The important point to remember is that two years down the line, when S&P revisits its rating for India, we will be only a year, or perhaps just a few months away from the next general election. I would say that at that point, S&P may point to the political atmosphere and buy itself more time.
The economy is eventually not just about economics, but also politics.
However, months before the last election, S&P had in September 2014 upgraded India's rating to 'stable' from 'negative'.
We can hope that if the political atmosphere is not too charged, S&P may look more at the economic numbers than hidden political factors.
But, do consider the fact that S&P spoke about "strong democratic institutions and a free press" among positive factors on its mind in discussing India.If one were to extrapolate the same issues over a longer period, say, the two years that S&P speaks of, there may be signals to be read.
S&P's words indicate that rule of law is not simply the exercise of power by the government to frame policies that are good for the economy but other factors that show a larger, deeper social and political stability in an atmosphere in which courts, media and civil society function normally.
Recent actions such as a disciplining of either media entities or non-governmental organisations (NGOs) are bound to be watched keenly by international ratings agencies.
Sovereign ratings are ultimately not about rating a government but a nation as a whole and the economy at a deeper level. This implies some sort of stability that goes beyond a stable government. What ratings agencies such as S&P and Moody's say about factors beyond the economic numbers needs to be keenly watched.