Page 133 - ES 2020-21_Volume-1-2 [28-01-21]

116 Economic Survey 2020-21 Volume 1

CHAPTER AT A GLANCE

¾ 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.

¾ India’s sovereign credit ratings do not reflect its fundamentals. 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. it is rated 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. This outlier status remains true not only now but also
during the last two decades.

¾ 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 sovereign and
non-sovereign external debt. 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.

¾ As ratings do not capture India’s fundamentals, it comes as no surprise that past
episodes of sovereign credit rating changes for India have not had major adverse
impact on select indicators such as Sensex return, foreign exchange rate and yield on
government securities. Past episodes of rating changes have no or weak correlation with
macroeconomic indicators.

¾ India’s fiscal policy, therefore, must not remain beholden to a noisy/biased measure
of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s
sentiment of a mind without fear.

¾ Despite ratings not reflecting fundamentals, they can however be pro-cyclical and can
affect equity and debt FPI flows of developing countries, causing damage and worsening
crisis. It is therefore imperative that sovereign credit ratings methodology be made more
transparent, less subjective and better attuned to reflect economies’ fundamentals.