Page 117 - ES 2020-21_Volume-1-2 [28-01-21]

100 Economic Survey 2020-21 Volume 1

3.31 India is again a negative outlier, rated below expectation for the numbers of years since
last sovereign default (which is zero for India) within its sovereign credit ratings cohort (Figure
29). Unlike several of its cohort countries, India has never defaulted during the period.

3.32 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 sovereign and non-sovereign external debt. India’s sovereign external debt as per cent
of GDP stood at a mere four per cent as of September 2020 (DEA). Moreover, 54 per cent of
India’s sovereign external foreign currency denominated debt was owed to multilaterals and
IMF as of end-March 2020 (DEA), which is not expected to impact credit rating assessments.
Since India does not have full capital account convertibility, the private sector has to repay its
foreign currency denominated debt by exchanging rupees through the forex reserves. India’s non-
government short term-debt as per cent of forex reserves stood at 19 per cent as of September
2020 (DEA). India’s forex reserves stood at US$ 584.24 as of January 15, 2021 (RBI), greater
than India’s total external debt (sovereign and non-sovereign) of US$ 556.2 bn as of September
2020 (DEA). In corporate finance parlance, therefore, India resembles a firm that has negative
debt, whose probability of default is zero by definition. Despite this compelling statistic, India
is an inexplicable negative outlier in its ratings cohort. Figure 30 shows that within countries
with partial capital account convertibility in India’s sovereign credit ratings cohort, India has
consistently been rated much below expectation for its level of short-term external debt (per
cent of reserves) during the period 2000-20, emerging as a negative outlier.

3.33 Similarly, India has consistently been a negative outlier, rated below expectation for
its level of reserves adequacy ratio within its sovereign credit ratings cohort during 2000-20,
(Figure 31).

Figure 30: Sovereign Credit Ratings and Short Figure 31: Sovereign Credit Ratings
Term External Debt (per cent of reserves) and Reserves Adequacy Ratio

7 7

6 5 6 5
Average rating (1=BBB−/Baa3 to 6=A+/A1) Ordinal scale 4 3 Average rating (1=BBB−/Baa3 to 6=A+/A1) Ordinal scale 4 3

2

2010 2020 2 2015 2010

1 1 2020
2005 2015 2005

2000
0
0
2000
0 1 2 3
0 50 100 Reserves Adequacy Ratio
Short Term External Debt (% Reserves)
Source: Bloomberg, Datastream and World Bank Source: Bloomberg, Datastream and IMF
Note: Red shows India's rating during 2000-20 Note: Red shows India's rating during 2000-20