Your ratings have triggered quite a furore in India. Do you realise that?
That's a recent development. I'm not sure we always want to create a furore. Part of the problem is that these ratings become extremely politicised and are taken, very often incorrectly, as some kind of a commentary or measurement of the government's policies. They are affected by government policy, but are not meant to be some kind of scorecard about countries or governments. But that happens very often because they're a convenient and easy-to-remember symbol of evaluation. Quite often, what moves the ratings isn't entirely under the control of governments or something they can easily change by policy. It has a lot to do with the world economy. Ratings are fundamentally for use by investors in the capital market. That's the main audience. They won't have much effect on direct investors like Enron.
Are you suggesting that FDI won't be affected?
FDI is not going to be influenced much by our ratings, because they obviously look at the economics of their projects, the regulatory environment and many such things. Even equity investors will not necessarily be heavily influenced as they're much more interested in what the stockmarket is going to do. It's the bond investors or the bank deposit investors that are primarily the audience.
What did you find in India and what led to the change?
We are constantly looking. We're looking even when we don't have formal review under way. Any time our analysts believe the fundamental economic and political conditions have changed in such a way that our current rating is no longer appropriate, we sit down as a committee and discuss extensively what the rating ought to be and if necessary, we change the rating.
It is not a specific event, it is not necessarily tied to a particular budget or an election. It's an internal evaluation of change—of where the country fits in the overall rating scale. Obviously, some things are quite important; like government policy, the budgetary policy, the balance of payment deficit, fiscal deficit, the ability of the country to attract foreign investments. And these are all very political. We don't do a purely quantitative analysis. It is really a political-economy analysis.
It is qualitative.
Yes. It is very qualitative. That is unavoidable. You know ratings are forward-looking. We are not talking about the past, we are trying to predict the likelihood of a country crisis—country foreign exchange crisis. Just see what happened in Thailand and South Korea or Indonesia. Lately, there has been an exaggeration of the influence of the rating agencies. This is not surprising as we are very visible. But investors have many sources of information. Sometimes the market agrees with us, sometimes it doesn't. We have an independent opinion. It is not always the same as the market's opinion.
Tell us what you found about India and why did you change?
Most significant of concerns was what we expect to be an ongoing deterioration of the BOP in the current account deficit combined with an ongoing fairly large fiscal deficit. This is supposed to come down in this new budget, but is still quite high and may or may not come down as predicted. It was supposed to come down last year but actually ended up quite higher. Even at the current level it's quite high and continues to lead to a build-up of government debts. That's a concern for us.
We were also concerned about questions regarding the effect of sanctions and other concerns about foreign investments—whether that would lead to a fall in inflows of capital needed for financing the balance of payments. So those were the things we found to be of concern.
What about political stability?
We don't think that India is unstable politically in the way that, say, Indonesia was. We feel that the system is stable—even if governments change. The system has been around a long time. It is an open democratic system and that is fairly stable. We're really concerned about the political momentum behind the economic reform process—whether that really moves forward in a healthy way. We always felt that in the end—and in India a lot of people would agree—there needs to be some important, major structural changes to make the economy more effi-cient and raise its ability to export. And one of the things we always take into account is whether government policy is facilitating that—moving the reform process in the right direction.
And I think there were some legitimate concerns about this particular government and its budget as whether there was really a clear direction of policy and whether investors were being given the right signals. We ended up finding that the situation appeared to be a little bit more risky than before and that's why we downgraded. Here there can be genuine and legitimate disagreements. I'm sure the Indian government doesn't agree with us. But we have to make a judgment as to whether what they have put forward is going to work and going to succeed in ensuring the financial future of the country.
How much did the US announcement weigh in your decision?
The coincidence was really unfortunate. The sanctions had really very little do with our assessment. Our review of India had been under way from the beginning of the year—long before the nuclear tests or sanctions. So, there really isn't very much of a direct connection. I think we just felt that the sanctions could only make things a bit worse than they were. It's a secondary factor.
The US government's decision had nothing to do with your rating?
Moody's is completely and totally independent of the US government. I would have to tell very honestly that we have zero contact with any part of the US government.
What time-frame are we looking at before India can look forward to some change in its ratings?
Because of the way the process works, there's no specific or fixed time. We will be watching the situation all the time. And the upgrade could come at any point in which our judgment changes about the direction of things. Ratings have been moving up and down more frequently than they used to, because the world economy is more volatile. It's unlikely we'll move our ratings in a very short period.
