While India’s growth performance may not as yet warrant a ratings downgrade, political risk is not only about assessing the economic consequences of politics. It is also about the impact of politics on the “standards of governance”. (Image: ADB)

Last week Fitch, the international firm that does sovereign credit rating, stirred up anger in Washington DC as it downgraded the United States’ sovereign rating, citing the US government’s political handling of domestic debt as a reason and spoke of a “steady deterioration in the standards of governance” in America. It is often not recognised that apart from economic and fiscal policy management, the global ratings agencies also take a close look at the political management of policy when determining a country’s risk level.

Indeed, one of the triggers for the balance of payments crisis in India of 1990-91 was the sequential downgrade of the country’s sovereign credit rating, beginning in August 1990, on account of the rising political risk. Moody’s, the New York based international rating agency, took the first step on August 1, 1990, placing India on a “credit watch for possible downgrade”. The reason offered had less to do with the state of the economy, of fiscal and foreign resources management, and had more to do with the emerging political uncertainty. “Political conditions in India have weakened since our initial rating assignment in 1987”, observed Moody’s. drawing attention to the jockeying for power underway in New Delhi. Over the next few months, Standard & Poor, Fitch and the Japan Bond Research Institute joined Moody’s, and a wave of downgrading began as the political environment became increasingly challenging.

While the present Indian government’s fiscal management has been reasonably good, the external sector has displayed worrying signs with a rising trade deficit and an unstable exchange rate, and trade and industrial policy is in a spin.

The latest instance of arbitrariness being in the new laptop import policy, including for regular travellers. This is a return to the “control-permit raj” that was prevalent in the country in the pre-1991 era.

While India’s growth performance may not as yet warrant a ratings downgrade, political risk is not only about assessing the economic consequences of politics. It is also about the impact of politics on the “standards of governance”. In the last one month the US state department and other governmental organisations and congressional committees have repeatedly raised concerns about what may be called, in Fitch’s recent language, the “standards of governance” in India. Various individuals and institutions in Washington DC have expressed concern about religious freedom and communal tension, the situation in Manipur and, most recently, the violence in Gurgaon.

The US government statement about the recent events in Gurgaon elicited a defensive response from the Government of India. The external affairs ministry issued a cryptic statement that it hoped to see a “return to normalcy” in time for the G-20 summit in early September. It sounded like a plea from South Block to North Block. The external affairs ministry is hoping that the home ministry would swiftly get a grip on the situation before Gurgaon’s communal violence entered New Delhi and disrupted the G-20 party.

Even if the communal tension in Gurgaon is contained within Haryana, it would still have a global impact because Gurgaon is now a global city, not just a North Indian village. What happens in Gurgaon no longer stays within Gurgaon!

Peace and security, as that old adage goes, are indivisible. The events in Gurgaon have had a global resonance. The issue, however, is not merely one of law-and-order management. It no longer is. It is about the efficacy of government, the rule of law, the “standards of governance”, and the even deeper challenge of a society and a nation divided. So it is not just the “stability” of government, an issue that would have been uppermost in the minds of analysts in 1990-91 with minority governments in office, but the “standards of governance” that also influence the assessment of country risk.

This challenge to the India political risk is not just on account of Manipur or Gurgaon. This has become a national problem cutting across the political divide and across states. There are no minority governments around today, worried about their longevity. Yet, despite the comfortable majority that governments at the Centre and in most states enjoy, the “standards of governance” are fast eroding across the board, with rising arbitrariness on the part of the civil administration, the police and politicians. Local mafias dressed as vigilante groups are holding people and businesses to ransom.

Over the past three decades, a view had come to define investment decisions that some parts of India are safe for investment since the local administration in these parts are less arbitrary and more professional. I used to be told by many business leaders that states like Gujarat, Maharashtra, Karnataka, Tamil Nadu and the erstwhile united Andhra Pradesh were “safe bets”. In recent years, Gurgaon, Noida and the stretch between Delhi and Jaipur had emerged as preferred destinations.

Today, there is no state where the concerns on governance, corruption of the local administration, collusion between political mafias and the police are not being raised. India’s unwillingness to accept the verdict of external arbitration in high-profile cases, new restrictions on travel and trade, new laws governing the media and the dilution of the right to information are some of the arbitrary decisions that are raising concerns about the environment for business and the rule of law.

There was a time in history when one man was berated as “Tughlaq” -- the wise fool, as he has come to be known, and the symbol of arbitrary and whimsical governance. Today, in democratic India, “Tughlaqs” abound, from the national capital to every state capital. Arbitrary governance, the brazen misuse of government agencies, the deliberate refusal to appear accountable to the institutions of democracy, and the subversion of such institutions, have all raised concerns about the rule of law and the standards of governance.

Meenakshi Lekhi, the minister of state of external affairs, blurted it all out last week when in a heated response in Parliament she warned an Opposition member of Parliament that the Enforcement Directorate would get after him if he did not calm down. Manipur, Gurgaon, Meenakshi Lekhi and every “Tughlaq” in every government is contributing to the potential rise in the India political risk.