Economic Survey has called out credit rating agencies for being biased against India in assigning sovereign credit ratings thus adversely impacting the FPI inflows.

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India, being the fifth largest economy of the world has been consistently rated below expectations as compared to its performance on various parameters like inflation, gross debt, current account balance, investor protection, political stability, probability of default, reserves adequacy ratio etc., in the last two decades, according to the survey laid in the Parliament.

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“Never in the history of sovereign credit ratings has the fifth largest economy in the world has been rated the lowest rung of the investment grade (BBB-/Baa3). Reflecting the economic size and thereby the ability to repay the 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,” the survey said.

A sovereign credit rating is an independent assessment of a country’s ability to repay its debt obligations. On the request of countries, rating agencies (predominantly- Moody’s, Fitch and Standard & Poor’s) evaluate their economic and political environment. A good rating also helps in attracting foreign direct investment or FDI besides getting access to funding in international bond markets.  While Standard & Poor’s gives a BBB- or higher rating to countries it considers investment grade, and grades of BB+ or lower are considered to be speculative or “junk” grade.

Moody’s considers a Baa3 or higher rating to be of investment grade, and grade of Ba1 and below is considered as speculative. As per the Economic survey report, currently, India is rated investment grade by three major credit rating agencies – S&P, Moody’s and Fitch.

India’s sovereign credit rating downgrades during 1998-2018 are mainly confined to the 1990s on account of the post-Pokhran sanctions in 1998. It witnessed sovereign credit ratings upgrades mainly in the second half of 2000s because of higher economic growth prospects and strengthened fundamentals of the economy. In addition to this, during most of the 1990s and mid-2000s, India’s sovereign credit rating was speculative grade.

Its credit rating was upgraded to investment grade by Moody’s in 2004, Fitch in 2006 and S&P in 2007. Notably, Indian economy grew at an average rate of over six per cent and at approximately eight per cent in several years during this period.

According to the Chief Economic Advisor of India, KV Subramanian, India’s rating doesn’t reflect its fundamentals as its ability to repay its debt is of gold standard and it has never defaulted on its ability to pay debt. “Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations by becoming more transparent and less subjective. Developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology to prevent exacerbation of crisis in future,” the economic survey said.

The Sensex, foreign exchange rate and yield on government securities being unaffected by the changes in sovereign credit rating is a testimony to the fact that the ratings do not capture fundamentals of the economy, as per economic survey. However, according to survey, ratings can affect equity and debt FPI flows of developing countries, causing damage and worsening crisis. It is therefore imperative, that sovereign credit ratings methodology be made more transparent, less subjective and better attuned to reflect economies’ fundamentals.