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Has Moody’s rated India fairly vis-à-vis peers?

Even if calendar year growth of 8.8 percent and 8.3 percent are considered, India would still be the fastest-growing economy. India’s adequacy of foreign exchange reserves should be the least of the worries for credit rating agencies.

October 07, 2021 / 09:20 AM IST
Representative image

Representative image

India joined the ranks of Russia and Italy after credit rating agency Moody’s improved its position on the outlook of the country’s sovereign rating to stable from negative. The rating remained unchanged at Baa3, which is at the lowest investment-grade rating. In contrast, Portugal was awarded an upgrade of its sovereign rating to Baa2 from Baa3 and outlook to positive from stable.

India’s ratings continue to compare poorly against other large economies, such as the US, China, Japan, Germany and the UK. The US and Germany have Aaa ratings from Moody’s. The UK is a few notches lower with an Aa3 rating, followed by China and Japan with A1. France, with an economy almost as large as India’s, has a credit rating of Aa2.

Several other nations that are at a similar level of development such as Indonesia, Thailand, Mexico and Peru have a higher sovereign credit rating. Moody’s continues to maintain Colombia’s rating at Baa2 even though S&P’s and Fitch have downgraded it due to political upheaval caused by tax reform plans.

India’s policy-makers have long held a view that the country was being rated way lower than peers despite better performance on various parameters such as GDP growth, consumer price index inflation, fiscal deficit, general government gross debt, current account balance, adequacy of reserves, short-term external debt and political stability. So much so, an entire chapter was dedicated to India’s unfair credit rating in the Economic Survey for 2020-21.

How does India fare?


Take a look at how India compares with others with a similar or better rating.

Consider, for instance, the GDP growth forecast for the current year and the next made by the International Monetary Fund (IMF) in its July edition of the World Economic Outlook (WEO) report. India’s economy was projected to expand by 9.5 percent in 2021-22 and by 8.5 percent in 2022-23, making it the fastest-growing economy.

Even if calendar year growth of 8.8 percent and 8.3 percent are considered, India would still be the fastest-growing economy. Moody’s has projected India’s growth at 9.3 percent growth for the current fiscal year and 7.9 percent for the next.

Russia and Italy, which have the same sovereign rating as India, will expand at a slower pace. The WEO has projected that Italy and Russia may expand by 4.4 percent and 4.9 percent, respectively, this calendar year. China was projected to grow 8.1 percent, before the emergence of the Evergrande and the ongoing energy crisis. The US and the UK were both projected to expand by 7 percent.

Adequacy of reserves is another consideration in credit rating assessment. India’s adequacy of foreign exchange reserves should be the least of the worries for credit rating agencies. As the fourth-largest holder of foreign exchange reserves, of about $638 billion currently, India has enough to pay off all short-term debts of the private sector, sovereign and other.

Russia holds about $618 billion, Italy about $170 billion and Portugal about $29 billion. Indonesia, Thailand, Mexico and Colombia together held a little more in foreign exchange than India.

India’s short-term external debt was less than a fifth of the total external debt according to the estimates of the Reserve Bank of India. At the end of June 2021, India’s total debt stood at $571.3 billion, of which the short-term debt was estimated at $102.5 billion. The ratio of short-term debt to foreign exchange reserves was 16.8 percent but more importantly, India’s foreign exchange reserves were more than the total debt outstanding.

Comparable data for other nations are updated only till 2019 in the World Bank database. As per that, the ratio of short-term debt to total reserves for India was 23 percent. For Russia, which currently has the same rating as India, the ratio stood at 10.4 percent. The ratio for Indonesia, Mexico and Thailand were higher – at about 27 percent for Thailand and above 34 percent for Indonesia and Mexico. For China, the ratio was 37.4 percent despite its enormous reserves, the largest in the world.

Even with the dependence on external borrowing, India was in a better position than many countries rated higher by Moody’s. Again World Bank data, updated till 2019 show that the ratio of India’s total external debt to gross national income was 19.7 percent.

Indonesia, Thailand and Russia were more indebted, with the external debt to GNI ratio of 37 percent, 34 percent and 30 percent, respectively. China reported a lower ratio at 14.8 percent. Kazakhstan with a better rating than India and Russia reported that its external debt was nearly as large as its GNI.

The calendar year 2020 had also proven positive for international trade in goods and services. With imports shrinking due to contraction in demand and a sharp fall in crude oil prices, India reported a current account surplus of 1.3 percent of GDP. In the preceding year, India has reported a current account deficit equivalent to 1 percent of the GDP, which had narrowed from 2.4 percent in 2018. Italy, Russia, Mexico, Thailand and China too reported a current account surplus of 1.9-3.7 percent in 2020 but Indonesia reported a deficit of 0.4 percent of GDP.

The debt problem

What worked to the disadvantage of India was its high general government debt. In its statement improving the outlook for India, Moody’s took note that the country’s “general government debt burden had increased sharply from 74 percent of GDP in 2019 to an estimated 89 percent of 2020 GDP, significantly higher than the Baa median of around 48 percent”.

It added that interest payments were 26 percent of general government revenue, the highest among Baa-rated peers and more than three times the Baa median of 8 percent. Thus, India’s debt affordability is seen as weak.

In comparison, countries such as Indonesia and Russia reported relatively low general government debt. In the instance of Indonesia, Moody’s observed that the sovereign’s credit profile was supported by narrow fiscal deficits and low government debt ratios. Credit challenges for Indonesia were low revenue mobilisation and a reliance on external funding.

About maintaining Russia’s credit rating at Baa3 with a stable outlook even as the country is under economic sanctions imposed by the US, the rating agency has taken note of “very strong fiscal position, supported by low levels of government debt and rebuilt fiscal buffers”. Moody’s expects Russia’s general debt ratio to peak at around 20 percent of GDP by the end of 2021, which it says remains modest relative to rating and emerging market peers.

Kazakhstan has a better rating than India at Baa2 with a positive outlook due to the size and effective use of the country’s sovereign wealth assets, which the rating agency expects will grow and continue to exceed the level of government debt for the foreseeable future.

As for Portugal, the bump-up in its ratings happened despite what Moody’s described as “high levels of government debt, which limits the government’s fiscal space to withstand shocks”. The country’s debt burden was 133.6 percent of GDP in 2020 and Moody’s expects it to reach 127 percent of GDP in 2021.
Tina Edwin is a senior financial journalist based in New Delhi.
Tags: #Moodys
first published: Oct 7, 2021 09:16 am

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