India’s Sovereign Credit Rating Do Not Reflect Its Fundamentals’

India resembles a firm that has negative debt, whose probability of default is zero by definition, said Survey

India’s Sovereign Credit Rating Do Not Reflect Its Fundamentals’
India’s Sovereign Credit Rating Do Not Reflect Its Fundamentals’
Vishav - 30 January 2021

The Economic Survey 2020-21, which was tabled in the Parliament on Friday, has rejected India’s Sovereign Credit Ratings saying that they do not reflect India’s economic fundamentals. It said that credit ratings, which normally reflect the willingness and the ability of the borrower to pay its obligations, do neither when it comes to India.

“India’s willingness to pay 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.

The Survey added that incorporating finance parlance, 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 rating cohort.”

It added that since the ratings do not capture the country’s fundamentals, India’s fiscal policy must not remain beholden to this “biased measure”.

However, it admitted that these ratings do damage foreign portfolio investment flows. “It is therefore imperative that countries engage with credit rating agencies to make the case that their methodology must be corrected to reflect economies’ ability and willingness to pay their external obligations,” it said.

The Survey pointed out that never in the history of sovereign credit ratings has the economy ranked fifth largest in the world been rated as the lowest rung of the investment grade, as is in the case of India.

“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 adding that the fundamentals that “supposedly drive” sovereign credit ratings do not rationalise this historical anomaly.

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