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Updated: April 29, 2012 21:34 IST

A rater for raters?

K. T. Jagannathan
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They are activists of a new kind emerging as undeclared watchdogs. From America to Zambia, countries around the world are now under their scanner. Nations across the canvass — from developed to developing — go into a huddle when these soothsayers of the economy indulge in liberal advice of the unsolicited kind. Welcome to the world of credit raters. Not surprisingly, they have become active Opposition to ‘governing leaders' — from Obama to Manmohan Singh.

India is the latest to feel the rating heat. Standard & Poor's (S&P) last week cut the country's sovereign credit rating outlook from stable to negative. And, it went on to warn India of rating downgrade if ills afflicting the economy weren't fixed sooner than later. In line with the lowering of sovereign rating outlook, it also downgraded the rating outlook to negative for many big Indian firms. The S&P action has set off a predictable chain of reactions. While some have reacted dismissively, others have pressed the panic button. C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, is convinced that the S&P outlook is ‘unwarranted'. Finance Minister Pranab Mukherjee has reacted a lot more cautiously.

“Situation may be difficult,” he admits. But he is confident of coming out of it.

Even as S&P revised the outlook to ‘negative', rival Moody's feels that “India is growing solidly but below potential.” With competition all pervasive, even among rating agencies, it becomes that much difficult to view the true picture. Is India growing? Or is it slipping? The glass is half-full or half-empty, depending upon the viewer. While Moody's sees in Reserve Bank of India's (RBI) rate cut action positive signs, S&P reads negative signals from slowdown in reform measures!

Are these rating agencies testing their abilities a little too much? In 2008, we saw the collapse of big U.S. institutions with history, reputation and brand equity.

The needle of suspicion for the collapse then pointed to the rating agencies.

From pure rating outfits, many of these agencies had by then gone a long way and diversified to offer a host of allied services to their clients whose debt instruments they rated. Not surprisingly, questions were raised then about their ability to rate objectively.

The rating agencies themselves came under the scanner then. Since then, the world has changed a lot for them.

Far from being considered a ‘suspect' for the global financial collapse, they have now become serious protagonists of financial discipline. The financial world believes them. And, the resources-stressed governments look always for funders to relieve their worries. Ipso facto, the rating agencies have a decisive say!

Not everything could be looked at from a simplistic prism. In a vast democracy like India with very many federal governments, things will indeed progress slowly. Seeking consensus has its own perils and advantage.

Much of the reforms happened in the post-1990 period when New Delhi had a series of unstable governments. Somewhere along the line the country has lost its way. More than anything else, it betrays a sense of inability to practice what the corporate world now calls co-operative competition.

Political leadership across the spectrum seems to have failed to practice a consensus approach to even a commonly agreed agenda. India is still a growth story. And, it is up to the leadership to not to allow bad politics to spoil the economy of the nation.

As the debate generated by the rating agency's action heats up, many questions prop up. The rating agencies have become aggressive post-downgrading of U.S. rating.

Are their words ultimate? Will their new-found competitive activism give rise to a call for a ‘rater for raters'!

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