After Moody’s, next wave should combine economic and governance reforms

Has the economy turned the corner? To answer that question, it’s futile to cite Moody’s recent upgrade of India’s sovereign rating from Baa3 (just above junk investment status) to Baa2 (the country’s highest rating since 1991 but still several notches below China’s A+ rating).

There are two reasons why the Moody’s upgrade should not excite Indian policymakers unduly. First, sovereign ratings are time-lagged. While ratings are not determined by one-off events, the full consequences of demonetisation and GST (negative and positive) haven’t been fully factored in by Moody’s. Second, rating agencies are notoriously unreliable. Several (including Moody’s rivals, Standard & Poor’s, and Fitch) have been excoriated for getting corporate and sovereign ratings wrong. None of them predicted the September 15, 2008 financial meltdown sparked off by the collapse of Lehman Brothers, then one of Wall Street’s blue-blooded investment banks.

Class action suits have been filed against US credit rating agencies for incompetent or biased ratings. As The Guardian reported earlier this year: “Moody’s has agreed to pay nearly $864 million to settle with US federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis. S&P Global’s Standard & Poor’s entered into a similar accord in 2015, paying out $1.375 billion. 

As part of its settlement, Moody’s also agreed to measures designed to ensure the integrity of credit ratings going forward, including keeping analytic employees out of commercial-related discussions. Connecticut’s law suit claimed that Moody’s ratings were influenced by its desire for fees, despite claims of independence and objectivity. It also accused Moody’s of knowingly inflating ratings on toxic mortgage securities.”

All this doesn’t mean that P Chidambaram and Dr Manmohan Singh are right to dismiss Moody’s upgrade of India — the first in nearly 14 years — as being of no consequence. The 10 years of UPA-1 and UPA-2 were barren. Scams, not reforms, took centre stage. Moody’s upgrade signals that after three-and-a-half years of the BJP-led NDA government, the Indian economy is finally moving in the right direction. Global ratings, however mixed their track record, are as much about trajectory as they are about outcome. Despite the twin traumas of demonetisation and the needless complexity of GST, the government’s intent is seen internationally as being proactive though implementation is perceived as reactive.

The Moody’s upgrade, on the heels of India’s 30-rung rise up the World Bank’s ease of doing business (EDB) ladder, should not lull Indian policymakers into complacency. It should energise them to move rapidly towards economic and governance Reforms 3.0.

There have been two distinct phases of reforms during the Narendra Modi government’s tenure so far. In phase one, a flurry of schemes was launched. Many have done well — for example, Mudra Bank for small loans, Jan Dhan Yojana to increase financial inclusion and Digital India. Other schemes have fared less well. Swachh Bharat Abhiyan is locked in a cultural time warp with newly built toilets remaining unused due to age-old traditions of keeping homes free of human waste. Make in India and Skill India, too, have yet to gather traction.

In phase two, structural reforms, including recapitalising NPA-laden banks, are underway. More seriously though is the lack of key governance reforms. A Lokpal is still not in place. Police and administrative reforms are moving ahead glacially. A newly allocated budget for police modernisation is welcome but does nothing to implement the 2006 Supreme Court directive on police reforms. 

The Aadhaar scheme has been globally recognised as an innovation where India leads the world. But the government’s insistence on using biometrics for even rations in non-internet connected villages has caused untold hardship. The same story is repeated in GST where small traders without access to technology spend far too much time and money on compliance in the face of  bureaucratic-driven complexity of tax slabs on hundreds of products.

The Moody’s upgrade still ranks India below countries like Mauritius (Baa1) and Thailand (also Baa1). This reflects poorly more on Moody’s than on the Indian economy which, despite its self-inflicted wounds, has far sounder fiscal policies than many countries which are rated higher. The obsession with global rankings, however, is a peculiarly Indian trait. It manifests itself in global university rankings as well. India should stop trying to improve its rankings in the World Bank’s ease of doing business by targeting narrow modular parameters. Focus on real reforms. Rankings will follow.

Reforms 3.0 must combine economic and governance reforms. The roadmap is clear. Lessen bureaucracy in every area of business and citizens’ lives. Be less intrusive. Repeal the retrospective tax. Abjure tax terrorism. Iron out post-GST wrinkles. Complete existing schemes before starting new ones.

Francis Fukuyama, the celebrated political scientist, wrote in his book The End of History and the Last Man that a successful democratic nation must possess three qualities: First, strong law and order; second, good governance; and third, political accountability. These three watermarks should serve as targets for the Modi government. 

Law and order implies implementing police reforms. Good governance means establishing a strong Lokpal. Accountability involves robust interaction of political leaders with both media and public. Along with opening up the economy and de-bureaucratising infrastructure project clearances, these three reforms will maximise governance and minimise government. That, after all, was the original intent of the Modi government.

The writer is author of The New Clash of Civilizations: How The Contest Between America, China, India and Islam Will Shape Our Century