Poor Standard and pretty Moody !

Last week, the US Department of Justice charged Standard and Poors of intentional fraud - of making 'limited, adjusted and delayed updates' to its rating criteria resulting in the agency giving favourable ratings to several structured finance papers , leading to massive losses to investors.

S&P and their ilk do not give recommendations - they just give 'opinions', and hence they have always claimed constitutional protection for freedom of speech....and so, they cannot be just pulled up for. Some argue that what happened was essentially a mistake on the part of the investor.... caveat emptor ( buyer beware !) -nothing prevented the investor from doing his own due deligence.

While this does appear to be a strong point for the agencies, there is a catch. Regulators across most countries, insist that investments made by banks and financial institutions have to be rated and they also specify acceptable rating agencies and S&P , Moodys and Fitch surely figure in most of these lists. (While rating agencies do a lot of things these days, I am not sure if the agencies would be in the pure ratings business if regulators do not insist on investments being rated). This means, they 'enjoy' a quasi-official status. Investors hence rely on their ratings to invest. There hence is a fiduciary responsibility that agencies owe - to protect investors by giving a true and objective assessment. So, while one should not take away the responsiblity of an investor to look with care before he invests, one should not also take away the responsibility of the agency to be true - particularly as the investor is directed to take the view into consideration, by regulators. And the standard of work by the agencies in discharging this responsibility has been pretty poor.

The other way of looking at this is that a seller is responsible for ensuring that his product performs to standards that it claims to have. Agencies, certify the level of standard and get paid for it. So, when the product fails to meet the standards, the seller has to be pulled up - and with him the Agency which abetted in the sale.

Any which way one sees this, the agencies need to be made accountable. Ever since the financial crisis, there have been several attempts to pull up the agencies for their flawed ratings and to regulate them. And frankly, I am happy that S&P is being hauled to courts - and irrespective of the final judgment ( or settlement), there are two possible gains :

1) Investors will not rely on these ratings beyond a point (infact, investors of sovereign debt market have begun to repudiate rating actions.
2) Agencies will hopefully become more responsible in their job.

The move by the US Gov is however surprising - why is there a case against only S&P ?... Moodys and Fitch too played their part in the crisis. Is it because the US Gov is still in a bad mood after the S&P downgrade in August 2011 ?

Increased dependence on the Public Distribution Scheme

The recent NSSO survey results of the PDS and other sources of household consumption, done in with over a lakh households in 7428 villages and 5263 blocks across the country shows an increased dependence of households on the PDS. Some of the salient points in the survey are
a) Rice purchase under PDS had increased to 23.5% in rural areas ( compared to 13% in 2004-05) and to 18% in urban areas (compared to 11% in 2004-05)
b) Wheat / Aatta purchase had increased to 14.6% in rural areas ( compared to 7.3% in 2004-05) and to 9% in urban areas (compared to 3.8% in 2004-05)
c) Sugar purchase had increased to 14.7 % and 10.3% in rural and urban areas ( compared to 10.3% and 6.6% respectively in 2004-05)

And 39% of rural households and 20.5% of urban households depend on the PDS. While some of us would possibly become happy and think that the figures show an increase in the efficiency of the PDS, the results are disturbing considering that , this dependance is because,

a) Survey results show a reduction in levels of employment. The labour force fell from 496.4 M in 2005 to 487.6 M in 2011. Of the employable population, 9.8 % is unemployed, clearly indicating that growth is not leading to increased employment.

b) Food prices have grown manifold in the last few years. Rice price had increased from about 12,890 per MT in 04-05 to 32,320 per MT now ( reaching a peak of about 42,500 per MT in 2008), for a 10 year period the increase is around 222 %. Sugar prices have gone up by around 177%.

These can then only mean that they are signs of growing distress at the lower strata of the population. Possible reasons why we have not seen any major upheaval till now could be the combination of the MNREGS and the PD System. But these cannot be long term solutions. A major rethink on the structure of the economic growth model is needed, with a clear focus on making it truly inclusive - and unless that is firmly in place, any move to cut down subsidies would result in major social upheavals. The doubt is whether, given their firm western schooling, people at the helm have the willingness and capability to come out with economic models for growth that suits this country and its citizens who have become more dependent on subsidies for survival.