India’s Sovereign Ratings don’t reflect its fundamentals

Source: Indian Express, The Hindu

Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Synopsis: The Economic Survey 2020-21 concludes that sovereign credit ratings are biased, and they do not reflect the Indian economy’s fundamentals.

Background:

• Currently, India’s sovereign rating is rated under a very low investment grade.
• Though it will not impact market performance, rupee value against the dollar, or on G-Sec yield. But it can impact the FPI inflow into equity and debt instruments.

On what basis the economic survey has made this remark?

• As per the survey, it is for the first time in history, India, which is the fifth-largest economy in the world, has been rated as low in the investment-grade (BBB-/Baa3).
• Historically, the fifth-largest economies have been mostly rated AAA. It reflects the economic size and its ability to repay debt. China and India are the only exceptions to this rule.

What is the solution to address this issue?

• The economic survey suggested reworking the sovereign credit rating methodology to make it more transparent and less subjective.
• It also called for co-operation among developing economies to address this bias and subjectivity, inherent in sovereign credit rating methodology.

What are the other factors affecting investment according to the Economic survey?

• The Economic survey pointed out the issue of over-regulation in the Indian economy. The survey suggested simplification of regulatory processes along with transparent decision-making processes.
• The survey also highlighted the problem of asymmetric information between the regulator and the banks which was noticed during the forbearance regime. (short-term relief for borrowers to postpone loan payments-Witnessed during the Pandemic)
  • • The survey suggested conducting an Asset Quality Review exercise immediately after the forbearance is withdrawn.

India’s willingness to pay debts is demonstrated often through its zero sovereign default history. So, the current sovereign ratings are not a representation of India’s growth and commitments.