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Economic Survey calls rating agencies' bluff

Source: PTI
January 31, 2017 20:25 IST
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S&P in November ruled out an upgrade in the country's rating for some considerable period, citing India's low per capita GDP and relatively high fiscal deficit.

Chief Economic Advisor Arvind Subramanian on Wednesday slammed global rating agencies for following "inconsistent" standards while rating India vis-a-vis China, saying they have not taken into account reforms measures like Goods and Services Tax, which is a "poor" reflection on their credibility.

He said India has taken reform initiatives like liberalising foreign direct investment rules, bankruptcy code, monetary policy framework agreement, GST and Aadhaar Bill.

"Despite all these achievements, it is very interesting that the rating agencies have not reflected this... We have shown (in Survey) what kind of inconsistent standards the rating agencies have.

"We call these poor standards because S&P said last year that there is no way they could upgrade India because of GDP and fiscal deficit," Subramanian said.

US-based Standard & Poor's (S&P) in November ruled out an upgrade in the country's rating for some considerable period, citing India's low per capita GDP and relatively high fiscal deficit.

"The actual methodology to arrive at this rating was clearly more complex. Even so, it is worth asking: are these variables the right key for assessing India's risk of default?" the Economic Survey asked.

India's government debt to GDP ratio stands at 68.5 per cent.

Subramanian said S&P has rated China six grades above India and has held China's ratings steady since 2010 despite economic growth slowing to 6.5 per cent from 10 per cent.

In contrast, India's has moved in opposite direction and growth has increased.

"Yet how did the rating agencies behave? Despite all these risky developments they did not downgrade China and our rating was maintained six notches below China. This is reflection on how these institutions work. You should question them," he said.

The pre-budget Economic Survey said S&P in December 2010 increased China's rating from A+ to AA and despite the "ominous scissors pattern" of Chinese economy, and declining growth has not downgraded it.

"In contrast, India's ratings have remained stuck at the much lower level of BBB-, despite the country’s dramatic improvement in growth and macro-economic stability since 2014.

These contrasting experiences raise a question: can they really be explained by an economically sound methodology?" the Survey asked.

Subramanian said per capita GDP, which is a factor taken into account by rating agencies for upgrade, is a very slow moving variable.

"If this is taken to be really key to ratings, poorer countries might be provoked into saying, 'Please don't bother this year, come back to assess us after half a century'," the

Economic Survey, prepared by Subramanian, said.

The practice of ratings agencies to combine a group of countries and then assess comparatively their fiscal outcomes shows India is an outlier because its high debt-GDP ratio and debt of 67.1 per cent are out of line with its emerging market "peers".

The survey said India is very different from the comparators used by the ratings agencies as many emerging markets are struggling.

"But India has a strong growth trajectory, which coupled with its commitment to fiscal discipline exhibited over the last three years suggests that its deficit and debt ratios are likely to decline significantly over the coming years.

"Even if this scenario does not materialise, India might still be able to carry much more debt than other countries because it has an exceptionally high 'willingness to pay', as demonstrated by its history of not defaulting on its obligations," it said.

The Survey said India also compares favourably to other countries on other metrics known to be closely related to the risk of default.

It said in the US financial crisis in 2008, questions were raised about the role of rating agencies in certifying as 'AAA' bundles of mortgage-backed securities that had toxic underlying assets.

"Similarly, their value has been questioned in light of their failure to provide warnings in advance of financial crises - often ratings downgrades have occurred post facto, a case of closing the stable doors after the horses have bolted.

But it is also worth assessing their role in more normal situations," the Survey added.

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