Indian mystery

Tbe big thing in ratings these days is contingent liabilities. In India''s case, no one is prepared to be open as to what they are.

At the FinanceAsia Asian Debt Conference this year, we were privileged to have the erudite Dr YV Reddy as a keynote speaker. The well-regarded deputy governor of the Reserve Bank of India was speaking about India's debt markets. He was clear and transparent.

Except in one area: the federal government's contingent liabilities.

When I broached this question at the end of his speech he gave an odd wink. It was the wink of a man who knew a question was coming but wished it wasn't. He then gave some fairly vague answers and refused to be pinned down on a number.

The contingent liabilities in question are those of the various Indian states, such as UP and Bihar. The issue has become something of a political hot cake in India in recent months as it has suddenly been realized that these states have been guaranteeing a whole series of corporate and public sector bonds.

In fact, 36% of all private placements issued last year were guaranteed by one of these states û and practically all Indian corporate bonds are private placements.

Reddy was not clear on whether these guarantees constitute an explicit guarantee by the federal government. That's because the issue is extremely technical. But, again, in practice he conceded that the federal government would stand behind these obligations, rather as the German federal government stands behind pfandbriefe.

But when I asked exactly how big a chunk of GDP this amounted to, he said "it's only been an issue for the last few years and so the amount is quite small". But he would not give a precise figure.

Well-informed sources I have spoken to in India don't think the figure is small at all. It could be up to 10% of GDP. That's a figure that will have the rating agencies concerned û especially since they are now very focused on the contingent liabilities of the sovereign.

If it were 10%, that would make India's deficit substantially worse than it actually appears. Given that most of the data coming out of India is generally positive, I would assert û conversely û that this off-balance-sheet number is probably higher rather than lower. The first law of Bombay Economics is that if everything is going well in India it's usually because something else is going badly wrong. And if a central banker can't give you a number, it's because something's generally up.

Luckily the Indian government seems to have realized it has a problem. At a recent meeting with local chief ministers an agreement was hammered out to cap these guarantees. That's good, but it won't eradicate the huge number of guarantees already made.

One thing is certain: this is a number that everyone should know, but hardly anyone does. 

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