US based bond credit rating agency Moody’s upgraded Indian government’s bond rating from Baa3 to Baa2. This is one level up from their lowest rating grade. They have changed their outlook of the Indian economy from positive to stable with this upgrade. Modi government ministers and its supporters are terming this upgrade as an endorsement of their policies of demonetization and GST for which they are under intense backlash and criticism of late.
One thing that I vividly remember about Moody’s is that this is the same credit rating agency which failed miserably in seeing the sub-prime credit crisis coming in 2007. Just before the sub-prime bubble busted in 2007, this agency was rating the toxic mortgage backed securities (MBS) with their highest rating level of AAA! After the crisis this rating came down to their lowest level of junk!
Does this upgrade matter so much?
The fundamental theory behind this bond rating upgrade is the flawed Keynesian idea of ‘borrowing and spending’ to boost economic growth. As we have discussed many times in past, economy doesn’t grow when the government or people spend (out of their income or via borrowing) and consume, but when people save, invest and accumulate capital. Government borrowing only siphons off private saving and investment funds which actually slows down economic growth in future. It lowers our standard of living. Most of the government spending is pure consumption in the form of various welfare schemes. This is sheer waste of society’s saved resources. And whatever little so-called investment like building roads, bridges, dams etc., the government carries out fails to pass the market test of profit and loss. All government projects are highly inefficient and very costly. They continue to make losses year after year, but unlike any private firm they never go out of business because they earn their so-called revenue not by satisfying consumers’ most urgent needs by providing them best quality products at the lowest possible price but by coercing and robbing the tax payers. This again is sheer waste.
And, if at all this upgrade will reduce the cost of borrowing for private companies of India that also will not help the Indian economy very much because this borrowed money will be used by the fascist business tycoons to shore up their empires, as has mostly happened in past, instead of serving the poor Indian consumers. Borrowed money will go in the stock or real estate markets where it will be used for speculation instead of any productive purpose.
Conclusion
All in all, borrow and spend policy will fail in the end because it can’t produce real economic growth. The big Indian government with its all out interventions in the economy is the real problem. This upgrade is a bad news for people because it will allow this big government to borrow and spend more and become even bigger!
On the topic of estimates made by foreign agencies, what is your opinion on the reports by Merrill Lynch that India would be third largest economy by 2028.
There is no legitimacy in such long range future forecasts. No one knows what lies in future for sure. It is possible that the Indian nation state itself may not exists in 2028! Who knows? And if you have read my book review here on the concept of GDP then you know that the whole exercise of measuring the size of the economy itself is dubious.