The econocracy is busy doing the predictable downplay of the downgrade in India’s investment outlook. A more honest approach would be to confirm that Standard & Poor’s concerns (see full text below) are ours too. Honesty alone can create a grudging constituency for economic reform. Honesty is good politics too.

There’s manic Monday, ticklish Tuesday, wacked-out Wednesday, and now thumping Thursday. There’s also freaky Friday. Unfortunately, credit analyst Takahira Ogawa, who broke the bad news, has said the actual downgrade of India’s rating (there’s a 1/3 chance of that) may take another two years. So, in Ogawa’s Thursday announcement PM’s men and our doddering octogenarian leaders seem to see plenty of time to bullsh*t us. But here’s the reality:

a) This isn’t an actual downgrade (but it dampens sentiment of those willing to invest in India)

b) Adverse action, if at all, is two years away (but how deep we wish to go courting social unrest? Is it the 2014 time-frame chief economic advisor Kaushik Basu had in mind, until which time we’re expecting the economic engine to run on Mamata and fresh air?)
c) No reaction has come from our most credible economist, the PM himself (on his @PMOIndia Twitter account, he last posted a speech to civil servants given on April 21. Nothing meriting his attention seems to have happed ever since. Where did I hear, “Prime Ministers don’t comment on a mere S&P”?)

But hear this. Ogawa, the agency’s voice insofar as we are concerned, had given our netas a lead via business daily Business Standard eight months ago: “In terms of India’s sovereign rating (BBB-/Stable), according to us, inflation remains India’s biggest challenge in the near term, as it could push up credit costs and dampen the country’s economic growth trajectory. Although the pace of food prices seem to have stabilised to some extent, the prices of manufactured products are on a rise. Ballooning fiscal deficits also constrain the sovereign ratings of India. Continuing its fiscal consolidation policies into FY2012 will be a key challenge for the government.” Compare this to the language of the release today. (Below)

On what India’s leaders could do (and obviously didn’t), Ogawa had told BS in August itself: “We (S&P) could raise the ratings on India if the government continues to reduce the public sector’s deficits materially. For example, future government initiatives to significantly reduce subsidies for fertilisers, food and fuel would be a positive factor in improving the expenditure structure of the budget and reducing the negative influence of potential external shocks on India’s fiscal position. Strong commitment of the central and state governments to the medium-term fiscal consolidation plan set out in the recommendation by the 13th finance commission is key to India’s fiscal consolidation. Early implementation of the GST could help stabilise and potentially increase government revenues in the medium-term and become a further positive factor for the sovereign ratings. Conversely, continued loose fiscal policy or policy setbacks on monetary, financial and economic reform fronts that lower India’s medium-term growth prospects could result in a downgrade.”

Mark the words. I quote Ogawa again: “Continued loose fiscal policy or policy setbacks on monetary, financial and economic reform fronts that lower India’s medium-term growth prospects could result in a downgrade.” We could be replaying this in 2014.

Obviously, despite some of the smartest economists in our system, Basu, C Rangarajan and Montek Singh Ahluwalia to name just three, nothing that our economist PM did (or to be fair, could have) comes anywhere near Ogawa’s pro bono advice. This might not change until we have a full-blown crisis, like we weathered in 1991.

We can discount professional economists as political lightweights, who from their ivory towers, can’t really understand the compulsions of coalition politics. But how does one explain the performance of politico-economic talent around the PM? I confine the point to the deadly duo of Pranab Mukherji and P Chidambaram. Could these two notables have helped in course correction? My sense is that they tried, but knowing the limited economic literacy of their political interlocutors, both ministers chose survival over taking the bull by the horns. Sad! Less than honest too!

A quick comment on why, contrary to the fallacy that good economics is bad politics, by abetting with bad economics the political class is unwittingly in bed with bad politics. As Ogawa noted in the BS interview, “the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk relative to the pre-2008 levels. If a renewed slowdown comes, it is likely to create a deeper and more prolonged impact than the last one. The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow.”

In India’s case, where would that leave money even for the wooly-headed social schemes anchored by Sonia Gandhi’s national advisory council?

So, my tuppence: Managing the economy and the polity isn’t two different things. It’s like managing the family. Populism isn’t just bad economics. It’s bad. Period.

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The text of Standard & Poor's announcement

SINGAPORE (Standard & Poor's) April 25, 2012

Standard & Poor's Ratings Services today affirmed the 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India. Standard & Poor's also revised the outlook on the long-term rating to negative from stable. The transfer and convertibility assessment for India is unchanged at 'BBB+'.

*The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting.

*India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings, but they are restrained by large fiscal deficits and debt, as well as its lower middle-income economy.

*We expect India's real GDP per capita growth will likely remain moderately strong at 5.3% in the current fiscal year ending March 31, 2013, compared with about 6% on average over the prior five years, but down from 8% in the middle of the last decade. India's favorable demography and the increasing middle-class population will undergird its medium-term growth prospects, which in turn will support the sovereign ratings.

*India's external position remains resilient despite the deterioration in the past two years. The country's foreign currency reserves cover about six months of current account payments, down from eight months in 2008 and 2009.

*Similarly, the country's net external liability position has risen to about 50% of current account receipts, but more than half is related to foreign direct investment and portfolio equity flows, which are less problematic than debt in most scenarios. Currency flexibility also offers a buffer against volatile external flows.

High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock. Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors.

*The negative outlook signals at least a one-in-three likelihood of the downgrade of India's sovereign ratings within the next 24 months. A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow.

*On the other hand, the ratings could stabilize again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate. Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertilizer subsidies, or an early implementation of the goods and service tax.