Standard and Poor’s India ratings are flawed, says Surjit Bhalla; here is why

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New Delhi | Published: November 28, 2017 5:43:19 AM

Standard & Poor's (S&P) decision to keep India’s sovereign rating unchanged at the lowest investment grade of “BBB-” last week partly on grounds of the country’s low per capita income is flawed, according to Prime Minister’s Economic Advisory Council member Surjit Bhalla.

Standard and Poor, Surjit Bhalla, S&P, lowest investment grade, low per capita income, Prime Minister Economic Advisory Council, return on investments, risk perception, low per capita incomeStandard & Poor’s (S&P) decision to keep India’s sovereign rating unchanged at the lowest investment grade of “BBB-” last week partly on grounds of the country’s low per capita income is flawed, according to Prime Minister’s Economic Advisory Council member Surjit Bhalla.

Standard & Poor’s (S&P) decision to keep India’s sovereign rating unchanged at the lowest investment grade of “BBB-” last week partly on grounds of the country’s low per capita income is flawed, according to Prime Minister’s Economic Advisory Council member Surjit Bhalla. At a ceremony to launch his book, titled The New Wealth Of Nations, on Monday, Bhalla argued that a country’s rating should be guided more by return on investments and risk perception, among others, rather than low per capita income. Finance minister Arun Jaitley launched the book.

Speaking on the occasion, NK Singh, who led the FRBM panel and was on Monday appointed chairman of the 15th Finance Commission, said rating agencies like S&P, whose views were sought when the FRBM report was being compiled, are concerned not just about low income levels in India but they tend to base their rating on the fact that for a country with such a low level of per capita income, the debt and the fiscal deficit levels are high. Bhalla also argued that the inflation monster is perhaps dead and that the rupee is among the most under-valued currencies now, certainly more under-valued than China’s. He also said while the gender inequality is somewhat bridging in urban India, the rural India will have a lot of catch-up to do.

Last week, while S&P has spoken favourably of institutional reforms, robust growth figures (It forecasts average 7.6% annual growth over 2017-20), it has cited low per-capita income of $2,000 in 2017, high debt levels of around 68% of GDP and risks to general government fiscal deficit due to worsening deficit level of states. Moody’s, however, upgraded India’s sovereign rating by a notch recently in recognition of reforms in recent years. While a sharp rise in per capita GDP is unlikely in near future, given the sheer size of population, the income levels are expected to rise an impressive 6.5% over 2017-20, even according to S&P’s estimate.

The agency has also recognised that India’s external debt, net of liquid public and financial sector external assets, will average a modest 8.4% of current account receipts during this period. Earlier this year, Singh-headed Fiscal Responsibility and Budget Management (FRBM) Committee had recommended that the Centre should aim for a fiscal deficit of 3% of GDP for three straight years starting the current financial year itself and gradually reduce it to 2.5% by 2022-23 and partner states in adhering to fiscal discipline. While recommending replacing the 13-year-old Fiscal Responsibility and Budget Management (FRBM) Act that saw many amendments since inception with a new Debt and Fiscal Responsibility Act, the panel stressed that outstanding public debt could be curbed by raising the share of growth-inducing expenditure and trimming revenue deficit to just 0.8% by 2022-23 from 2.3% in 2016-17. It has suggested a ceiling for general government debt (both Centre and states) of 60% of GDP by 2022-23.

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