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Sovereign ratings not capturing India’s economic fundamentals: EcoSurvey (Ld)

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New Delhi, Jan 29 (IANS) The methodology for sovereign credit ratings should be made more transparent, less subjective and better attuned to reflect India’s economic fundamentals, said the Economic Survey 2020-21 on Friday.

The survey document tabled by Union Finance Minister Nirmala Sitharaman in Parliament noted the discrepancies in India’s ratings vis-a-vis past trends.

“Never in the history of sovereign credit ratings has the world’s fifth largest economy been rated at the lowest rung of the investment grade (BBB-/Baa3) except in the case of China and India,” the survey said.

The fifth largest economy has been predominantly rated as AAA, the only exception to this trend has been India and China, the survey said.

Further, the survey document pointed out that India’s sovereign credit ratings have “no or weak” correlation with macroeconomic indicators.

However, it cited that ratings can be pro-cyclical and affect equity and debt FPI flows of developing countries, causing damage and worsening crises.

Besides, it has called for all developing countries to come together to address the bias and subjectivity inherent in sovereign credit ratings methodology and bring in more transparency.

India has already raised the issue of pro-cyclicality of credit ratings at G20.

As per the survey, India’s ability to pay can be gauged not only by the extremely low foreign currency-denominated debt of the sovereign but also by the comfortable size of its foreign exchange reserves that can pay for the short-term debt of private sector as well as the entire stock of India’s sovereign and non-sovereign external debt.

India’s sovereign external debt as percentage of GDP stood at a mere four per cent as of September 2020.

Furthermore, it said India’s forex reserves stood at $584.24 billion as of January 15, 2021, greater than India’s total external debt of $556.2 billion as of September 2020.

“Given the private export earnings, India’s large forex reserves are in fact an under-estimation of its ability to repay its short-term obligations. In corporate finance parlance, India resembles a firm that has negative debt, whose probability of default is zero by definition.”

Additionally, it evidenced instances of systemic under-assessment and bias in the sovereign credit ratings over a period of at least two decades.

The survey advises that India’s fiscal policy should not be restrained by biased and subjective ratings; rather it should focus on growth and development.




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