Archive for July 10th, 2009

Of Family Silver & Credit ratings

10 July 2009

Selling national silver.

Gross National Savings (GNS) rate of India is among the highest in the world. GNS as a percentage of GDP is higher by 20% points for developing Asia, which includes India, than world average or even the average of advanced economies. Even with their non-existent or meagre disposable incomes the poor in India & developing Asia still find ways to cut their ‘non-essential (?)‘ needs and find ways to save with an eye on the future. Often such savings metamorphose into gold or schemes of self help groups or postal savings or bank deposits or their combinations, euphemistically called in English the ‘Family-Silver‘, & wait their turn to help in times of opportunity or crisis. When opportunity arises such savings result in investments in shelter, education or some economic enterprise. What is true for people however is not so in case of their elected representatives & government? Of course, in latter case we are dealing in ‘Public money’, that is easily disposable as loose change, aren’t we?

NDA government in 2003 had enacted a Fiscal responsibility & budget management act (FRBMA) to avowedly rein in profligate fiscal behaviour that only serves short term self-interests of ruling elite. UPA-I seemingly built upon it when in 2005 the cabinet committee on economic affairs (CCEA) decided to invest proceeds of disinvestments from public sector enterprises into a National Investment Fund (NIF) rather than conveniently diverting them into consolidated fund of India (CFI). It was not an innovative feature. Government was simply taking a leaf out of common man’s approach to his budget. CFI is an omnibus pocket, money from where can go anywhere – from raising statues to paying increased allowances for members of parliament. Whereas NIF mandated that when government sells ‘National-Silver‘ the money should go for acquiring or building some other national assets the way common man does. Failure in implementing FRBMA during last 6 years is now sought to be compounded by undoing the CCEA decision on NIF. Everything is naturally being done in ‘National Interest‘. However it is not clear as is usually the case how it serves national interest. Nor is it clear what is meant by national interest.

Poverty of ratings.

When ‘ultrahigh leveraged debt‘ disguised as exotic ‘high yielding securities‘ (CDO) unravelled due to defaults in repayment of home-mortgages, it erupted into a devastating financial crisis in USA. World still reeks from its stench with no sure closure in sight. Warren Buffet once famously said that when the tied goes out inevitably everyone knows who is swimming naked. Less commented & even less acted upon by the national governments is the issue of role played by the rating agencies like Standard & Poor, Moody‘s & Fitch. They had issued AAA very safe investment ratings to securities that turned out to be not even worth junk-bond status. Such high ratings let the financial crooks in insurance companies, investment & commercial banks, home-mortgage companies etc. to carry on their chimera for so long & to spread the shit so far. Either the competence or the integrity or even both of these ratings agencies are in severe doubt. Yet neither have they been questioned or their rating methodologies scrutinised, nor have they been brought to book for their acts of grave omissions & commissions. Some noises were made about their getting paid from the very companies they rate. Just like a purely imagined scenario, if judges were to be paid their salaries by the defendants arraigned before them. Delinking such cosy relations is but a small step, a very small step indeed! Malice I suspect runs much deeper. Considering their role in the hole that they facilitated being dug so deep that entire world finds itself in it, they & all other crooks deserve a financial-Nuremberg trial to bring everybody involved to account. Primarily concerns till now seem solely focused on the damage to the super structure in total disregard to the misery & penury caused to the man in the street.

Still these rating agencies reign supreme. Barring few high fliers of financial wizardry who were punished to save rest of the flock, others have simply exchanged chairs to continue at the helms. Collectively they still enjoy formidable financial clout. Standard & Poor has warned that current sovereign rating of India, BBB-/A-3/Negative, which is the lowest investment grade, is under watch because of galloping fiscal deficit. If not reined in then the rating could fall into not good for investment category. That would mean stifling the flow of funds to India. Won’t it be a sure recipe for compounding our woes? Even if rating agencies are suspect, on overall consideration in this instant S&P warning is not unwarranted.