The country's sovereign rating has been changed by Standard and Poor (S&P) from stable to negative within the space of a week. One interpretation could be that S&P is fickle. But the stable rating was an implicit one in the context of NTPC whose fortunes smiled following the ordinance on power tariffs which, however, is now to be diluted. It will be realistic to give the international rating agency the benefit of second thoughts. The country's current account deficit is 1.5 per cent of GDP. Only a small proportion of this gets covered by external assistance and net external commercial borrowings (ECBs).The basic dependence is on NRI deposits and foreign investment. Sustaining the capital account surplus could be a grey area in the medium term. (In the short term, forex reserves can be run down). Therefore, it is only to be expected that like S&P, other rating agencies will take a cautious view.
India will have to contend with dearer ECBs and hesitant foreign portfolio investment. Foreign directinvestors in specific projects will do their own appraisal and will not be influenced by sovereign ratings, except at the margin. This could be a growth area despite sanctions.
The short point is that the economy faces a potential decline in confidence abroad. Getting agitated will not help. Nor will specific sops to encourage foreign inflows be of use. Actually, these could be counterproductive, reflecting panic within. What will help is an internal strategy to boost investment. The trouble is that the centre is under pressure to curb the fiscal deficit; this will mean a cut-back in public investment rather than in revenue expenditure. GDP growth will hover around 5.25 per cent, though the best antidote to sanctions will be to take the GDP growth to 6 per cent. Foreign investment will then want a piece of the action.
It is time the policy-maker realised the role of foreign direct investment in sustaining capital account surplus to cover current account deficit.
Rather than budgetary sops, the focusshould be on investment policy. A view must be taken on whether foreign investment should be allowed in the area reserved for the small scale sector. This is where foreign investment interest lies; the attraction is cheap labour. For investment in power, tariff reform requires urgent consensus, if SEBs are to have sufficient funds to cover escrow commitments and if counterguarantees are to be meaningful. Hard decisions will have to be taken by a soft state.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
