Sovereign ratings: Economic Survey slams global agencies over ‘bias’

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January 30, 2021 4:13 AM

India’s non-government short term-debt, as % of forex reserves, stood at just 19% as of September 2020.

Unprecedented crises, they had stressed, warrant elevated government spending to rekindle growth impulses fast, while fiscal hawkishness is best reserved for normal times.Unprecedented crises, they had stressed, warrant elevated government spending to rekindle growth impulses fast, while fiscal hawkishness is best reserved for normal times.

The Economic Survey on Friday flayed global rating agencies for their prejudice towards India for decades and suggested that the country’s fiscal policy must not “remain beholden to a noisy/biased measure” of its fundamentals by them.

With this, the Survey seems to endorse the anxiety of several Indian economists, who had cautioned the government against holding back more stimulus measures to reverse a Covid-induced slide in growth for fear of potential rating action. Unprecedented crises, they had stressed, warrant elevated government spending to rekindle growth impulses fast, while fiscal hawkishness is best reserved for normal times.

Suggesting that India remains a clear outlier, the Survey said never in the history of sovereign credit ratings had the world’s fifth-largest economy 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,” it said.

It assessed various indicators, including GDP growth, general government debt (as % of GDP), cyclically-adjusted primary balance (as % of potential GDP), current account balance, reserve adequacy ratio and sovereign default history, to conclude that the fundamentals that supposedly drive sovereign credit ratings don’t rationalise this historical anomaly in case of India.

Credit ratings map the probability of default and, therefore, reflect the willingness and ability of borrower to meet its obligations, the survey argues. India’s willingness to pay up debt 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 external debt including that of the private sector,” it said.

India’s non-government short term-debt, as % of forex reserves, stood at just 19% as of September 2020. Its forex reserves can cover an additional 2.8 standard deviation negative event, which is typically an event that can be expected to manifest with a probability of less than 0.1% after meeting all short-term debt.

India’s forex reserves stood at $584.24 as of January 15, 2021, greater than its total external debt (including that of the private sector) of $556.2 billion as of September 2020. “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 outlier in its ratings cohort,” it stressed.

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