The latest Economic Survey authored by Chief Economic Advisor Arvind Subramanian’s team does not hide its disaffection for international rating agencies by referring, tongue firmly in cheek, to their “poor standards” in its very first chapter which deals with the economic outlook.
The well-written document goes on to highlight some of the macroeconomic strengths of India; in its subsequent chapters it documents in great detail the inherent strengths of the Indian economy.
It further states that if some of the slow-moving variables such as low per capita GDP were to be continued to be used, a few lower middle income countries would take more than 50 years to reach the upper middle income club and would be provoked into telling the rating agencies of the world: “Please don’t bother this year. Come back to assess us after half a century.”
If there had been a classic case of anyone exercising power without responsibility, it has been the international rating agencies. Their role in the sub-prime crisis has been written about in depth. Both the big two daddies of international rating reached settlements in the US to come out of litigation related to their horribly wrong prognosis of mortgage-backed securities.
While Standard & Poor’s paid $1.375 billion to settle a US justice department-led lawsuit that alleged that the firm had defrauded investors by issuing inflated ratings in the years preceding the financial crisis, Moody’s reached an agreement for $864 million just two months ago with the US justice department and 21 states, which accused the company of inflating ratings on mortgage securities that were at the centre of the 2008 financial crisis.
According to their own websites, they arrive at ratings by “analyzing the creditworthiness of a corporate or governmental obligor and gauging the resources available to it for fulfilling its commitments relative to the size and timing of those commitments.”
For business entities, future income and cash flows may come primarily from ongoing operations or investments.
For governmental entities, income and cash flows may come primarily from taxes.
In some cases, other resources, including liquid assets or, in the case of a sovereign obligor, the ability to print currency may be relevant.”
Running in the same place Seen from this perspective, one fails to understand why India continues to remain stuck at just above junk-grade ratings.
The Narendra Modi government has definitely built on the gains achieved by our country in the post-1991 period. After 2014, India has not had any tales of scams or corruption, and going by macroeconomic indicators the country is in a sweet spot of growth in comparison with other major economies. Further, India’s debt to GDP ratio is relatively low.
Its growth is at 7 per cent (forget the quibbling over the latest GDP figures), the reserves are above $360 billion and the current account deficit is at one of the lowest.
Admittedly, exports have been affected but global trade itself is down. Inflation is being managed within the Government’s and Reserve Bank of India’s targeted levels.
Comparing notes To get a sense of how inexplicable the ratings of the international agencies can be, it would be useful to compare the ratings of India, Spain and Italy, the last being a member of the elite G-8. In the aftermath of the 2008 crisis, panic gripped Europe and the worst-hit were a group of countries, pejoratively called PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Both S&P and Moody’s, who suffered the ignominy of reaching a settlement with the US authorities for going wrong on their ratings, have now rated India in the same grade as Spain and Italy.
And what is it that the PIIGS have that India does not have? A higher debt to GDP ratio, a lower rate of GDP growth, a much lower savings rate and lower forex reserves!
India’s debt to GDP ratio is the lowest, at 69 per cent, while Italy’s is the highest, at 132 per cent. India is the fastest growing major economy in the world today at about 7 per cent while among the PIIGS, it is Ireland which has about 4 per cent growth.
Our savings rate is higher, at about 31 per cent, in relation to any of these countries. Even in terms of fiscal deficit, the PIIGS have not being any better. For instance, Spain’s targeted fiscal deficit was 4.6 per cent in 2016, as against India’s 3.5 per cent.
So, what would explain the rationale for rating India in the same category as Spain and Italy? (In fact, both have a positive grade — better than India — within the same rating grouping). Ireland’s rating is A while Portugal and Greece have below investment grade rating.
Why the discrimination? From whichever macroeconomic indicator you look, except perhaps per capita income, India is better placed than these countries.
One cannot be faulted if one were to attribute oligopoly as the reason for the vagaries of ratings. It seems that it is a club of the West which decides ratings based on an esoteric rationale known only to them.
Perhaps, it is time the idea of a separate rating agency mooted during the last BRICS summit in Goa in October 2016 by the Prime Minister is converted into reality.
The writer is an executive in a leading commercial bank. The views are personal