Governments have to walk a tightrope between mounting legitimate defences against criticism and appearing too defensive and thin-skinned. So far, the Narendra Modi government has come across as leaning too far on the defensive side, taking snap decisions and issuing poorly thought-out statements. That is changing now, at least when it comes to criticism over its financial policies.
The government’s recent defences have been increasingly reasoned and data-based. It’s a welcome change.
Global perceptions of the Indian economy are often based on what international agencies like the International Monetary Fund (IMF) and credit rating agencies such as S&P Global and Moody’s have to say. Not too long ago, any negative assessments from such agencies were met with weak responses by the Indian government and would be based more on rhetoric rather than actual data or reasoned arguments.
There has been a gradual transformation in this approach, and much of it has to do with the officials chosen to lead the central bank and economic research agencies.
Two recent examples of Indian authorities standing up for themselves come to mind: the Reserve Bank of India (RBI) and the central government’s response to the IMF’s assessment that the central bank over-regulated the exchange rate, and the deeply-researched analysis by the office of the Chief Economic Advisor showing the weaknesses of the analyses of the credit rating agencies.
Take a look at the key players involved from the India side. The RBI’s response to the IMF would have been vetted by Governor Shaktikanta Das, former Economic Affairs Secretary in the Ministry of Finance. The government’s side was put forth by current Chief Economic Advisor V Anantha Nageswaran—a highly data-oriented analyst—and Executive Director in the IMF, KV Subramanian, who was also a Chief Economic Advisor.
Add to this the calibre of the current Finance Secretary (the top bureaucrat in the Finance Ministry) and the increasingly technically-savvy officials in the Office of the Prime Minister.
Between them, they have years of experience in setting government economic policy, comfort with data and its analysis, and a drive to portray India in the best possible light. This combination shows itself in the kind of discussions that are now taking place on India’s financial policy.
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Floating to stabilised
The IMF in mid-December released the 2023 edition of its annual Article IV report on the Indian economy. It’s a detailed assessment, based on the IMF staff’s visits to India, their discussions with senior officials in the Ministry of Finance and the RBI, and including their own data and calculations.
Most of the analysis elicited little comment. However, one change created quite an uproar in India’s financial policy circles: the classification of India’s de facto exchange rate regime was revised from the relatively free “floating” designation to what is called a “stabilised arrangement”. These are just technical terms to delineate countries based on how much they control their exchange rates.
Under a “floating” regime, a country exerts minimal control over its exchange rate, only intervening to stabilise unnatural volatility. Shifting India from this category to a “stabilised arrangement” means the IMF feels the RBI has been exerting too much control over its exchange rate in the recent past. In general, the more open an economy, the more free its exchange rate.
The corollary to this is that if a country’s exchange rate is deemed to be more controlled, then its economy is seen as being more under the influence of government regulation.
The RBI did not take this assessment lying down. The IMF’s report has a section that details the RBI’s objections. First, it “strongly disagreed” with the notion that its exchange rate interventions were more than those necessary to curb unnatural volatility. It pointed out, quite legitimately, that the IMF’s assessment covered only 7-8 months. An analysis of a longer period of 2.5 years would belie this assessment, it said.
Indeed, a look at the exchange rate data from June 2020 to December 2023 shows the rupee depreciated nearly 10 per cent during this period, well outside the 2 per cent range the IMF noted for the last 7-8 months.
The RBI also argued that the recent stability of India’s exchange rate reflects the improving strength of the country’s macroeconomic fundamentals, especially external facing ones like a reduction in the current account deficit, a revival of foreign capital flows into the country, and a comfortable foreign exchange reserves buffer. This was bolstered by a sub-report by Subramanian, also included in the main report, making the same arguments in greater detail.
These are data-based facts. While it can’t unequivocally be said that it’s exclusively these factors that have been responsible for a stable rupee, their impact is far from immaterial. Placing them on the record in defence shows our authorities are thinking deeply about these issues, and have eschewed a knee-jerk response in this case.
It also raises questions about the comprehensiveness of the IMF’s analysis. The validity of these questions is something the IMF will have to examine for itself, but now it knows its commentary is being scrutinised and not accepted as is.
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Perception-based ratings
The December 2023 paper by the office of the Chief Economic Advisor on credit rating agencies was not a response to any immediate concern. It aimed to understand whether the ratings of these agencies were fair to countries like India.
The short version of their answer–arrived at through econometric and other analysis–was that no, the ratings are neither transparent nor fair.
The paper first examined the methodologies employed by the three biggest international rating agencies—Fitch, Moody’s, and S&P. What it found was that the processes were different and non-transparent for all three, with very little being made public about how the ratings are calculated.
It makes the reasonable argument that, if one of the factors that determines a country’s credit rating is the transparency of its data, then that should also extend to the rating calculation process.
The analysis then goes on to show how more than half of the publicly available factors determining a country’s rating were qualitative rather than quantitative. They were based on the opinions and perceptions of a relatively small group of experts rather than more extensive surveys.
This dependence on qualitative factors has meant that India’s credit rating—measuring its ability and willingness to repay its debt—has not improved even though our economy has risen in the size rankings, apart from improving significantly in global indices like ease of doing business, logistics performance, innovation, etc.
Basically, the paper argued that macroeconomic performance has no impact on the credit rating, which makes no sense.
Finally, another reasonable argument the paper makes is that the measure of a country’s willingness to pay must be influenced by its past record of repayment, regardless of its economic situation. During hard times and good times, India has repaid its debt every single time and hasn’t defaulted even once. The ratings must reflect that good credit behaviour.
This makes sense. For individuals, repayment behaviour has a large bearing on their credit score. The same should hold true for countries.
Overall, the analysis showed that these agencies apply very different data-based metrics when assigning ratings to companies. However, when it comes to countries, they rely on opaque, perception-based measures. Even within countries, the weightages of the metrics are different for developed and developing ones. This difference is fine, but the basis and methodology for it needs to be made clear.
Although the Chief Economic Advisor was not writing this paper as a direct response to the rating agencies, it is publicly available and one hopes they read it. The credibility of their work depends on whether they are considered fair in their appraisals.
India is now a big player in the international economic field. Consequently, we will attract a lot of attention and analysis. It’s a necessary feature of government policy to engage with criticism and balance legitimate defence against defensiveness. This might yet become part of the stated job descriptions of senior government officials.
Views are personal.
(Edited by Ratan Priya)