Arvind Subramanian stands vindicated today. Moody’s downgrade of China’s sovereign rating by one notch may have reposed some faith in the ratings agencies’ methodologies, and raised hopes of a possible review of the parameters to compute India’s credit risk profile.
Earlier today, Moody’s Investors Service downgraded China’s credit rating by one notch to A1 (‘low credit risk’) from Aa3 (‘very low credit risk’), citing concerns over rising debt and slowing growth. China’s rating downgrade is first in 28 years, since 1989. Notably, China’s rating, even after the downgrade, is five notches above that of India’s Baa3 (‘moderate credit risk’).
India’s Chief Economic Advisor Arvind Subramanian has repeatedly slammed ratings agencies for their inconsistent treatment while rating India and China, as they consistently refused to upgrade India’s sovereign rating despite significant improvement in economic fundamentals over the years. Subramanian has blamed the ratings agencies for favouring China at the same time, even upgrading it, regardless of the country’s deteriorating fundamentals.
“The ratings agencies have been inconsistent in their treatment of China and India. Given this record — what we call Poor Standards — my question is: why do we take these rating analysts seriously at all?” Subramanian had said in an interview to PTI earlier this month.
A matrix of A, B, C
India, despite trying hard to make its case, could not secure a sovereign credit rating upgrade.
Three well-known ratings agencies, Standard & Poor’s, Fitch and Moody’s have not changed their ratings on India for at least over a decade. Moody’s has kept its Baa3 rating on India since January 2004; Fitch has kept India at the lowest investment grade rating of BBB- since August 2006; while S&P has maintained its BBB- rating on India since January 2007.
China, on the other hand, is rated A1 by Moody’s (after today’s downgrade); its equivalent A+ by Fitch; and a notch above AA- by S&P.
What India needs?
Most ratings agencies had declined to factor in various government reforms of the last two-years saying that the desired effects were yet to be seen. Fitch acknowledged that Prime Minister Narendra Modi’s government remains committed to continued reforms rolled out over the last three years, but said that the impact of the reform programme on investment and real GDP growth will depend on how it is implemented.
Similarly, Moody’s had expressed concerns over India’s high debt burden in comparison to the other countries with similar rating, and the country’s low debt affordability, Reuters had reported citing correspondence between India’s Finance Ministry and the ratings agency.