CEA Nageswaran calls on World Bank to make governance indicators transparent

Making the World Governance Index transparent may be the most important reform for international financial institutions, Nageswaran said on November 15.

Calling on the World Bank to make its Worldwide Governance Indicators more transparent, Chief Economic Adviser V Anantha Nageswaran has said that their subjective nature was leading to inappropriate assessment of developing countries' sovereign ratings by global rating agencies.

Speaking in the Capital on November 15 at a seminar on multilateral institutions for the 21st century, Nageswaran said making the governance indicators "less arbitrary" is the "easiest way" in which Multilateral Development Banks (MDBs) can help member countries get better access capital to meet global challenges and development needs.

Also Read: Moody's defends India political risk comment, says had to explain change in assessment

"…unfortunately or fortunately, (Worldwide Governance Indicators) play a very significant part in opaque and non-transparent ways in the credit rating assessment deployed by the three credit rating agencies in assigning letter-grades to the credit rating of member countries, particularly emerging markets," Nageswaran said, referring to global rating agencies S&P Global, Moody's Investors Service, and Fitch Ratings.

The World Bank compiles the Worldwide Governance Indicators using data from more than 30 think tanks, international organisations, non-governmental organisations, and private firms deemed credible. However, India has argued that these indicators – such as the Freedom in the World Index and the Economist Intelligence Unit (EIU) Democracy Index – are plagued with "serious" methodological problems, with Sanjeev Sanyal, a member of the Economic Advisory Council to the Prime Minister, even writing a paper in November 2022 criticising these indicators.

US-based Freedom House has given India a score of 66 out of 100 and tagged it 'partly free', while the EIU 2022 Democracy Index ranked India at 46 and classed it as a 'flawed democracy'. These indicators, among others, are used by global rating agencies to assess governance levels while deciding on countries' credit ratings.

Nageswaran, on November 15, repeated these complaints, saying the underlying sub-indices of the governance indicators are "purely based on the subjective opinions of some so-called expert institutions which do not have a presence on the ground nor do they understand whether the context in which they are making these judgements is appropriate or apt for the member countries".

"But these indices become an important part of the assessment methodology of the credit rating agencies and they do not reveal the extent to which these indices are implanted in their assessment process, the weights they carry, because there seems to be qualitative overlays on top of qualitative assessments. It's almost like...sub-prime cubed, which we experienced in 2007-08," the government's top economist said.

Also Read: Sanjeev Sanyal says India's sovereign ratings by global agencies utterly absurd

According to Nageswaran, the World Bank could easily – without obtaining the consent of its shareholders – amend these indicators to make them more transparent, which would help emerging economies be assessed objectively by credit rating agencies.

"If their credit rating improves, or at the minimum stops being downgraded, the amount of financing cost it will save in the global capital markets will run into billions of dollars which can then be spent on development needs and global public goods as well," he added.

A lower credit rating increases the borrowing cost for countries. The three global ratings agencies currently rate India at the lowest investment grade level.

Also Read: CareEdge enters sovereign ratings biz with eye on emerging market issues

Economic Affairs Secretary Ajay Seth, also speaking at the same seminar, said the unanimous adoption of the New Delhi Leaders' Declaration in September had demonstrated that the global community is willing to come together despite deep geopolitical divisions and that India is able to build consensus in a key global forum.

"Both these developments bode well for multilateralism in general and the G20 in particular. And it is imperative that the momentum is maintained," Seth said, adding that reforms for international financial institutions had to extend beyond the financial sphere and include their mandate, governance frameworks, and operational elements.