Why Indian government is wrong in cribbing about rating upgrade

The Indian government is peeved about rating agency Standard & Poor’s (S&P) reiterating the country’s sovereign rating and outlook but ruling out any upgrades for this year and the next.

Commenting on the report economic affairs secretary Shaktikanta Das said “The report of S&P says all the right things done by India. But still if the rating has not been upgraded, it does not bother us so much but it calls for introspection among those who do the rating.”

Government’s view point is that if investors are finding India as the only sweet spot in the world, why are the rating agencies not able to see the country through the glass. Government slammed S&P’s statement saying there was a ‘disconnect’ between rating agencies’ views and investor perception on India.

The US-based ratings agency maintained the lowest investment grade rating of ‘BBB-‘ with a ‘stable’ outlook for India citing the country’s sound external profile and improved monetary credibility.

There is some truth in Indian government feeling miffed, especially when one compares India’s rating with those of other countries with weaker economic parameters and a bleak outlook.

India is not the first country to complain about the slow pace of rating upgrades. A study posted on the World Economic Forum website shows that rating agencies overreact to deteriorated economic performance during downgrade periods and an under-reaction to better economic conditions during the recovery phases. It goes on to add that previously downgraded countries have little ability to accelerate future upgrades through enhanced economic fundamental performance.

Thus even if India is one of the fastest growing economies in the world, rating agencies not upgrading the country should not be viewed as a biased opinion. The agencies have historically been slow to upgrade a country. The report cites the South Korean example where the country was downgraded from ‘AA-‘ to ‘B+’, a drop of 10 ratings within months of the Asian currency crisis in 1997. Only in August 2016, has S&P increased the rating back to ‘AA-‘ nearly 19 years after downgrading the country.

Credit rating methodology adopted by various agencies has never been transparent. Ratings agencies have been accused of being reactive rather than proactive, especially after the financial meltdown in 2008. However, there are certain broad parameters which are taken into consideration while allocating a rating to a country.

An S&P presentation on World Bank site says that the rating agency as part of its analysis focuses on fiscal performance and flexibility, fiscal trends and vulnerabilities, debt levels and cost of debt, access to funding, debt structure and contingent liability.

S&P in the present rating commentary has advocated more efforts to lower government debt to below 60% of the GDP, it did not expect revenues to raise enough to meaningfully lower the deficit over the medium term. Further it said that the stable outlook balances India’s sound external position and inclusive policy-making tradition against the vulnerabilities stemming from its low per-capita income and weak public finances.

Rather than complaining about rating upgrades, Indian government and bureaucracy should be focussing on the reasons the agencies are pointing at for not raising the rating.

The first is the weak public finances. State of public sector banks and their vulnerability is very well known, it does not take a rating agency to point out that unless these are improved long term steady growth is a tall task.

But, even improving public finances is unlikely to improve the chance of a rating upgrade because the rating agencies look at per-capita income rather than total income. India’s large population leaves little in the hand of individuals. Even though on purchasing power parity India ranks third in terms of size of GDP, on a per capita basis it ranks around the 140 mark.

S&P had earlier pointed out that the biggest factor impacting the country’s rating is its per-capita income. India’s projected per capita GDP (as per S&P) of $2,404 by 2017 will still leave the country’s wealth at about one-third of the average of similarly rated countries.

There is little the government can do in reducing the population, but it can focus on growing faster than it currently is and making the GDP bigger so that per-capita income increases and thus a chance of improving its rating.

-Shishir Asthana

This article was published in Business Standard. Click here

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