Can the Q3 economy scorecard have any bearing on the outlook of rating agencies?

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Are international credit ratings biased against India? Policymakers often claim they do.

The latest official document to do so is the Economic Survey released on January 29. In a 36-page section devoted to ratings agencies, the survey points out that these credit rating agencies have never assessed India objectively.

It said: “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FDI flows. Sovereign credit ratings methodology must be amended to reflect economies’ ability to repay their debt obligations by becoming more transparent and less subjective.”

This voice, or the argument, is not new. In May 2017 chief economic advisor Arvind Subramanian alleged that the global rating agencies had a bias towards China despite its growth rate dipping lower than India’s. While delivering a lecture in Bengaluru, Subramanian attributed motives to the rating agencies and said the higher rating to China was designed to attract more business from that country.

Less than a month after the Indian economic advisor publicly expressed his opinion, Prime Minister Narendra Modi and Russian President Vladimir Putin said the two countries would collaborate to develop a credit rating industry that is “independent of political conjecture”.

India’s stand against the rating agencies was once again articulated at a BRICS summit in September 2017 when Modi made a case for establishing a BRICS credit rating to take on the western agencies that were allegedly unfair towards India. His choice of words also left little to interpretation. He remarked that the methodology of the rating firms was “one of the most egregious examples of compromised analysis”.

In 2017, the Centre’s ire was mainly triggered by the decision of rating agency Fitch to keep India’s sovereign rating at BBB-.

On August 1 that year, Fitch moved the country’s rating from BB+ to BBB- with a stable outlook.

After PM Modi’s remarks in 2017, Moody’s upgraded India’s rating from Baa3 to Baa2 in November of the same year. While the former Baa3 is the lowest investment grade rating, the latter signalled “positive”.

Most of the rating agencies including the most prominent three Moody’s, S&P and Fitch are based in the US. Right now all the three have the lowest investment grade rating for India.

Last year in June, Fitch revised outlook on India from stable to negative largely due to absence of growth possibilities in the economy and a ballooning public debt following the pandemic-induced lockdown. At the same time Moody’s downgraded India to the lowest investment grade with a negative outlook.

In 2020 while Fitch and Moody’s projected GDP contraction of India’s GDP by 5% and 4% respectively before the Q1 figures were available, the agencies revised the projections to 10.50% and 11.50% after the GDP contraction figure of 23.9% was announced.

In September last year when the COVID 19 crisis was at its peak S&P reaffirmed the lowest investment grade BBB- with a stable outlook. The agency also said that its stable outlook indicates its expectation that the economy would recover after the pandemic and that it would spring back in 2021-22.

While the agencies acknowledged that if the government pumped in investments to revive the economy, it could have helped avoid a deep downturn but laced it with the apprehension that it could have also put the weak finances – the huge deficit – under greater stress.

S&P ominously said that the continuous need to strike a balance between the two contradictory demands might “challenge India’s capacity to maintain sustainable public finances and balanced economic growth, if the recovery is slower than we anticipate.” S&P also said that the GDP could contract 9% in 2021 while in 2021-22 it would grow around 10%.

The Q3 figures announced on February 26 provides a context for a relook.

After languishing in the contraction phase for two quarters, the country’s economy inched above the zero level, clocking a 0.4% growth in the Q3 (October-December) quarter with a few sectors like manufacturing, construction and construction powering the return from the slump and an exit from technical recession. The CSO also said the economy could suffer a contraction of 8%, a full one percentage point lower than what S&P apprehended.

The biggest argument against the position taken by the rating agencies is that India never defaulted in its debt repayments. In the early nineties when the country came close to it, the government went as far as taking a disruptive step by inaugurating the reforms that charted a new course in the country’s history.

The government has also advanced an argument regarding size of the economy.

The Economic Survey noted that “never in the history of the sovereign credit ratings has the fifth-largest economy in the world been rated as the lowest rung of the investment grade. 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”.

Incidentally, AAA is the highest rating of S&P that indicates high creditworthiness. While size indeed means muscle and clout, India’s record of zero default is perhaps a stronger ground for demanding a higher rating.

Another point to note is that India is sitting on a foreign exchange reserve of $583.94 billion according to Reserve Bank of India data on February 5, that almost covers the entire external debt of the country.