India Economic Survey 2017: Govt takes a swing at rating agencies

Shishir AsthanaMoneycontrol Research

For perhaps the first time, the Indian government has made a strong statement against rating agencies. A box item in the introduction segment of the Economic Survey titled 'Poor Standards? The rating agencies, China & India’ lambasts the rationale and bias of the agencies.

In the box combatively entitled “Poor Standards? The Rating Agencies, China & India”, the government notes that the role of the rating agencies has 'increasingly come into question' in recent years.

The survey says that India is one of the few economies enacting major structural reforms. Yet, there is a gap between this reality of macro-economic stability and rapid growth, on the one hand, and the perception of the rating agencies on the other.

The survey questions the logic of Standard & Poor’s in November 2016 when it ruled out the scope for a ratings upgrade for some considerable period, mainly on the grounds of its low per capita GDP and relatively high fiscal deficit. Probing the premise of using these tools for awarding ratings the survey asks if these variables are the right key for assessing India’s risk of default.

On the point of per capita GDP, it says that it is a very slow-moving variable. Lower middle income countries experienced an average growth of 2.45 percent of GDP per capita (constant 2010 dollars) between 1970 and 2015. At this rate, the poorest of the lower middle income countries would take about 57 years to reach upper middle income status.

On fiscal variables the survey points out that the practice of ratings agencies is to combine a group of countries and then assess comparatively their fiscal outcomes. But India is deemed an outlier because its general government fiscal deficit ratio of 6.6 percent (2014) and debt of 67.1 percent are out of line with its emerging market peers. Data provided in the survey shows that among all the countries with better and comparable ratings, India is the only country which has seen a drop in government debt to GDP ratio.

The survey argues that India is on a strong growth trajectory at a time when other emerging markets are struggling. Further, its commitment to fiscal discipline exhibited over the last three years suggests that its deficit and debt ratios are likely to decline significantly over the coming years.

Comparing India with China the survey points out that in 2009 China launched an historic credit expansion, which has seen its credit-GDP ratio rise by about 63 percentage points of GDP. At the same time, Chinese growth has slowed from over 10 percent to 6.5 percent. India on the other hand has its GDP grow with credit-GDP ratio remaining flat.

Standard & Poor’s reacted to this ominous scissors pattern, which has universally been acknowledged as posing serious risks to China and the world, by increasing China’s rating from A+ to AA and it has never adjusted it since, even as the credit boom has unfolded and growth has experienced a secular decline. In contrast, India’s ratings have remained stuck at the much lower level of BBB-, despite the country’s dramatic improvement in growth and macro-economic stability since 2014 says the survey.

Questioning the credibility of rating agencies which was in doubt during the US financial crisis and their failure to provide warnings in advance of financial crises -- when ratings downgrades occurred post facto -- the survey asks if the logic of rating agencies can be explained by an economically sound methodology.