Context:

• S&P Global Ratings has kept India’s sovereign rating unchanged at the lowest investment grade of ‘BBB-’. Based on forecasts of an economic recovery following the resolution of the COVID-19 pandemic, S&P has kept the rating outlook for India at stable.
• S&P has projected a 9.5% GDP growth in the current fiscal year and a 7.8% GDP growth in the following year.

About Credit Ratings:

Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations.

Indian Strength:

• Zero sovereign default history.
• extremely low foreign currency denominated debt of the sovereign
• comfortable size of its foreign exchange reserves that can pay for the short term debt of the private sector as well as the entire stock of India's external debt including that of the private sector.

Biasness in Credit Rating Agency:

• CRAs downgraded East Asian crisis countries more than what would have been justified by these countries’ worsening economic fundamentals. This adversely affected the supply of international capital to these countries.
• Sovereign credit ratings tend to be reactive, especially for emerging market economies, with significantly higher probability of downgrade as well as higher size of downgrade as compared to developed economies.
• CRAs give higher ratings to developed countries regardless of their macroeconomic
• Subjective component of S&P, Moody’s and Fitch ratings tends to be large, especially for low-rated countries.
• S&P and Fitch are further shown to find it more difficult to upgrade African countries relative to other developing countries, for any given improvement in ability and willingness to repay debts.
• Findings suggest that respective home country, countries with linguistic and cultural similarity, and countries with higher home-bank exposure received higher ratings than justified by their political and economic fundamentals.

Indian Concern:

• India is a negative outlier and is currently rated much below expectation for its level of general government gross debt (as per cent of GDP).
• India is a negative outlier, rated much below expectation for its level of CPI inflation.
• India remains a negative outlier, currently rated much below expectation for its level of cyclically adjusted primary balance (per cent of potential GDP).
• India is a negative outlier, currently rated much below expectation for its level of current account balance (as per cent of GDP).
• India is a negative outlier and is currently rated much below expectation for its level of political
• India is again a negative outlier, currently rated much below expectation for its level of rule of law
• India is a negative outlier and is rated much below expectation for its level of control of corruption.
• India continues to be a negative outlier and is currently rated much below expectation for its level of short-term external debt (as per cent of reserves).

Does INDIA’S SOVEREIGN CREDIT RATING REFLECT ITS WILLINGNESS AND ABILITY TO PAY? NO!

• India is again a negative outlier, rated below expectation for the numbers of years since last sovereign default (which is zero for India) within its sovereign credit ratings cohort.
• India’s ability to pay can be gauged not only by the extremely low foreign currency denominated debt of the sovereign but also by the comfortable size of its foreign exchange reserves that can pay for the short term debt of the private sector.
• India’s sovereign external debt as per cent of GDP stood at a mere four per cent as of September 2020.
• Moreover, 54 per cent of India’s sovereign external foreign currency denominated debt was owed to multilaterals and IMF as of end-March 2020 (DEA).
• India’s forex reserves stood at US$ 584.24 as of January 15, 2021 (RBI), greater than India’s total external debt (sovereign and non-sovereign) of US$ 556.2 bn as of September 2020 (DEA).

POLICY IMPLICATIONS

Economics Survey 2020-21 found evidence of a systemic under-assessment of India’s fundamentals as reflected in its low ratings over a period of at least two decades. India’s fiscal policy must, therefore, not remain beholden to such a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear.

Download PDF