Issue related to Credit rating – CEA’s concerns apart, India needs better data

Source: The post is based on the article “CEA’s concerns apart, India needs better data” published in “Indian Express” on 23^rd December 2023.

UPSC Syllabus Topic: GS Paper 3 – Economy – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

News: India has experienced substantial economic growth in recent years. However, credit rating agencies (CRAs) have not correspondingly raised its sovereign credit rating.

How have various credit rating agencies (CRAs) rated India’s sovereign credit?

S&P Global and Fitch: They both raised India’s sovereign credit rating to BBB, marking the lowest investment grade.

Moody’s: It initially upgraded India from the lowest investment grade (Baa3) to the next level (Baa2) in November 2017 but later reversed this upgrade to Baa3 in June 2020.

India receiving such ratings despite being the fifth largest economy raises concerns regarding the opaque methodologies used by CRAs.

What concerns exist regarding the methodologies employed by CRAs?

Focus on Subjective Factors: CRAs rely too heavily on subjective qualitative factors like good governance and democracy while neglecting objective measures of a country’s ability and willingness to repay debt.

Concerns with Governance Indicators: Governance indicators used by CRAs explain only 68% of India’s rating.

This is because a country’s macroeconomic fundamentals, like GDP growth, inflation, and debt levels, are ultimately the key determinants of its ability to pay debt.

Hence, even if India improves its economic fundamentals, it might not affect its credit rating significantly due to the heavy reliance of CRAs on subjective factor like “governance indicators”.

Read More: India’s Sovereign Ratings don’t reflect its fundamentals

What can be the way ahead for India?

Fiscal Consolidation: India needs to reduce the government debt-to-GDP ratio, currently at 82%, to levels seen in 2006 (77.2%) and 2010 (66.4%).

Data Quality: There are absence of Census or household consumer expenditure survey results post-2011-12. Hence, India needs to improve its data accuracy and transparency by conducting required surveys.

Question for Practice: Critically analyze the challenges associated with the comparatively low sovereign credit ratings assigned to India by Credit Rating Agencies (CRAs). Suggest necessary measures to alleviate these concerns.