Page 101 - ES 2020-21_Volume-1-2 [28-01-21]

03

Does India’s Sovereign Credit Rating

reflect its fundamentals No! CHAPTER

“Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.

— Rabindranath Thakur

Never in the history of sovereign credit ratings has the fifth largest economy in the
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting
the economic size and thereby the ability to repay debt, the fifth largest economy has
been predominantly rated AAA. China and India are the only exceptions to this rule –
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this
chapter, the Survey asks this important question and answers a resounding No!

Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’s – India is a clear outlier on several parameters, i.e. a sovereign
whose rating is significantly lower than mandated by the effect on the sovereign rating
of the parameter. These include GDP growth rate, inflation, general government debt (as
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP),
current account balance (as per cent of GDP), political stability, rule of law, control of
corruption, investor protection, ease of doing business, short-term external debt (as per
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status
remains true not only now but also during the last two decades.

Credit ratings map the probability of default and therefore reflect the willingness and
ability of borrower to meet its obligations. India’s willingness to pay is unquestionably
demonstrated through its zero sovereign default history. 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 the private sector as well as the entire stock of India's external debt
including that of the private sector. India’s non-government short term-debt as per cent of
forex reserves stood at 19 per cent as of September 2020. India’s forex reserves can cover
an additional 2.8 standard deviation negative event, i.e. an event that can be expected
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt.
India’s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’s