Finance Minister Nirmala Sitharaman on January 29 presented the Economic Survey that details the state of the economy ahead of the government's Budget for the fiscal year beginning April 1, 2021.
The Economic Survey 2020-21, authored by a team led by Chief Economic Adviser Krishnamurthy Venkata Subramanian, states that India's sovereign credit rating does not reflect its fundamentals.
Quoting Bengali poet Rabindranath Thakur "Where the mind is without fear and the head is held high Into that heaven of freedom, my Father, let my country awake", the survey said it is imperative that sovereign credit ratings methodology be made more transparent, less subjective and better attuned to reflect economies' fundamentals.
"Never in the history of sovereign credit ratings has the 5th largest economy been rated as the lowest rung of investment-grade (BBB-Baa3)," the survey said, adding that India’s fiscal policy must not remain beholden to a noisy, biased measure of India’s fundamentals.
"Credit ratings map the probability of default and therefore reflect the willingness and ability of the borrower to meet its obligations. India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history," the survey said.
The report further said that India’s forex reserves can cover an additional 2.8 standard deviation negative event. "It is imperative that sovereign credit rating methodology be made more transparent, less subjective," it said.
In a chapter titled 'Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!', the report said that while sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows.
As ratings do not capture India's fundamentals, the survey said that past sovereign credit rating changes for India have not had a major adverse impact on select indicators such as Sensex return, foreign exchange rate and government securities yield.
"Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective. Developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology to prevent exacerbation of crises in future," the survey added.Slideshow: Economic Survey predicts strong recovery in 2021-22; here are the key highlights