S&P's sudden liking for India, after the warning, isn’t quite convincing

Shortly after it warned Indian policy-makers on the possible impact of the country’s weak macro-indicators on the sovereign credit profile, Standard & Poor’s has sharply upped the fiscal year 2016 GDP growth forecast to 7.9 percent, besides praising India for being the sole ‘bright spot’ in the Asia-Pacific region.

Just two days back, the same agency had warned India about its weak ‘fiscal and debt indicators’ coupled with low income indicators, which, according to S&P, would ‘constrain’ the country’s credit profile.

The, “improvements in India’s weak fiscal balance sheet are likely to be gradual and are thus unlikely to lead to a rating upgrade in the next three to five years,” the agency said.

Such observations, just days ahead of the union budget, would have mounted pressure on the Narendra Modi administration that carries the heavy burden of poll promises and the responsibility to revive the fortunes of a faltering economy.

But S&P’s subsequent observations would be soothing music to the ears of Jaitley and company. “India should be the Asia-Pacific region’s bright spot." “Weaker growth in China and Japan may be weighing on the overall sentiment, although India’s star is rising," the agency said.

Wrath of rating agencies, if translated into rating downgrades, isn’t a good news to anyone in the economy, as it worsens the risk perception on the economy and its inhabitants and ups the borrowing cost.

But, note the change in tone of S&P, even though both observations are in different contexts — the first in relation to the credit profile that are influenced by fiscal prudence and income generation, the second on the overall economic growth that is presumably based on the re-based GDP numbers.

Recently, the government changed the base year to calculate India’s GDP to 2011-12 and broadened the definition of GDP, including indirect taxes, that projected an economic growth of 7.4 percent for 2014-15.

If indeed the reason S&P finds why India’s “star’ will rise is the recent change in methodology, which is a bit unconvincing given that many economists had expressed confusion on the correlation between sharply revised GDP numbers and other key macro economic indicators such as credit growth, growth in manufacturing segment and financial services and tax collections.

Remember, after the revised GDP numbers came out, even S&P’s Indian subsidiary, Crisil, had said in its report that “credit growth does not sync with the sharp pick-up in GDP growth now shown for this fiscal. Credit growth is expected to potter around at 12-14 per cent compared with 14.3 per cent as of fiscal 2014-end.”

Further, Crisil pointed out that the growth in service tax collections slowed 10.2 per cent in the year so far (April to December), compared to 19.2 per cent in the same period of fiscal 2014. Other agencies and economists too raised eyebrows on the sudden jump in growth numbers.

As Firstpost has noted before , the re-based GDP numbers are not supported by multiple economic indicators, at least, at this stage.

In this context, specific reasons, which might have prompted S&P to come with a sudden bullish statement on a country, where, the agency see possible worsening of credit profile on account of its fiscal situation, lower income levels and absence of reforms, is a mystery.

Even if S&P justifies its observations with own reasons, one logical question is that isn’t it too early to assure an economy, where fiscal situation is perceived as weak, income generation is not satisfactory and debt indicators aren’t comforting, that its “stars” are rising already?

Sure, India is a star in making with its favourable demographic dividend, a political leadership with a stable mandate and its rich resources.

But the back-to-back, contradicting observations by global agencies on seemingly related subjects aren’t quite convincing if one read together and can even send confusing signals to the investors.