Economic Survey: India's unfair credit rating
The government's latest Economic Survey accuses global rating agencies of a bias against the country. This may be true, but not because our economy is too large to be rated poorly, as the Survey argues, but because of our good repayment record on sovereign debt
PremiumIndia has long harboured a sense of grievance against international credit rating agencies, and rightly so, given the discrepancy between its broad economic stability and the often-lousy grades that it is assigned. The Economic Survey for 2020-21, which was tabled in parliament on Friday, charged international credit rating agencies with prejudice against emerging economies such as India and China. The annual document, which details how the various facets of our economy fared last year, however, has used economic size as an argument. Historically, it says, the economy that is the world’s fifth-largest has “predominantly" been rated AAA, S&P’s top rating, an indication that it has been assessed to be comfortably placed to pay off its sovereign debt. And is therefore highly credit-worthy. By contrast, India, which displaced the UK in 2019 as the world’s fifth-largest, has been rated BBB-, the lowest investment grade. Anything lower, and various pension funds etc in the West would be obliged to stay away from Indian-issued bonds.
The Survey, which projects India’s economy to grow by 11% in 2021-22 after an estimated 7.7% contraction this fiscal year, points out that since 1994, only twice has the credit rating (as assigned by S&P and Moody's) of the fifth-largest economy in US dollar terms been poor. This was when China and India rose to that rank, in 2005 and 2019 respectively. If size is indeed significant, then the Survey's allegation of bias would hold. At first glance, it seems true that size matters. Being the largest certainly spells clout. In 2011, for example, S&P lowered America’s sovereign rating by one notch, after the world’s largest economy (and issuer of its most sought-after currency) raised its federal debt ceiling. This angered US officials, and was seen to have prompted an investigation of the rating agency’s role in the dubious ratings that various dicey mortgage-backed securities got, those bundles of home-loans that eventually crumbled in the fall of 2008 and caused the global financial crisis of 2008-09. S&P’s then chief Deven Sharma had to step down within days of downgrading the US.
That rating agencies rarely get credit quality right was exposed by that crisis, and even in India, they have been found to be well behind the curve in almost every default crisis. Another problem with these agencies is their pro-cyclical behaviour that is often seen to aggravate crises and fuel bubbles. They are too lenient when the times are good, and too harsh when economic conditions worsen, making booms and busts that much more dramatic. Yet, the alphabet string of letters they label businesses and economies with shape not just credit but investment decisions globally. The reason that India may be justified in its complaint, though, has little to do with size. Unless the country has the exorbitant privilege of printing the world's reserve currency, as the US has, there is nothing special that ensures a large economy will always repay what it owes. Our grouse should revolve around the country's flawless repayment record. The last time we were on the verge of a sovereign default, in 1991, we reformed our economy (with a nudge from the International Monetary Fund). Today, the country has foreign exchange reserves in excess of $584 billion, while its total external debt, including that of the private sector, is a shade over $556 billion. Somehow, we still find that Indian borrowers must pay higher rates of interest overseas than they would have to with a better rating. Global rating agencies need to overhaul their methodology to better reflect reality.
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