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Inertial Agencies

[stextbox id=”alert”]While S&P, Moody’s, Fitch, etc stay favourable to developed economies even as they slump, they reluctantly move our ranks up when we register better growth[/stextbox]

[dropcap]T[/dropcap]hat rating agencies are, often enough, more conservative while rating a developing economy than doing the same for a developed Western counterparts was reiterated, not in so many words though, by India’s Economic Affairs Secretary Shaktikanta Das. He felt that the decision of Standard & Poor’s to not upgrade India’s rating called for “introspection” on the part of the rating agencies. S&P maintained the lowest investment grade rating of ‘BBB-’ with a ‘stable’ outlook for India. It cited India’s sound external profile and improved monetary credibility but advocated more efforts to lower government debt to below 60% of the GDP. S&P also did not expect revenues to rise enough to meaningfully lower the deficit over the medium term. What is more, S&P said,

“The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts.”

SBI Analysis on rating bias

A couple of months ago, India’s largest bank Bank of India’s Economic Research Department did a detailed analysis of the foreign currency long-term sovereign ratings given by three major rating agencies, namely S&P, Moody’s and Fitch, for a group of 20 countries for the decade ended 2015. The research team constructed a rating migration matrix for the entire period. The rating migration matrix summarized changes in sovereign credit ratings over the given time horizon across different rating grades. The idea was to understand how rating agencies are in terms of rating upgrades and downgrades.

The results were an eye opener. It was found that the countries with the highest rating (AAA) have the greatest probability of retaining the same rating (96%) even though these have witnessed considerable turmoil during 2006-2015. Developed nations fall into this category and it seems that, in the absence of creation of new havens of certainty, the rating agencies have kept their rating constant so that the system is not destabilised further. One may recall that the rating agencies faced severe criticism when they rapidly downgraded Eurozone countries owing to the Euro debt crisis. Agencies, it was said, were adding fuel to fire.

Despite attention to the emerging economies in the public domain (countries in the range A- to BB+), their ratings have not changed much even after the improvement in their macroeconomic performance. A case in point is India, which has remained stuck in BBB- category, notwithstanding its better performance relative to other emerging market economies.

India’s growth was affected during the global crisis of 2008, but the economy showed resilience and recovered soon after. Since 1992, on a net basis (upgrades adjusted for downgrades), India has witnessed only a solitary rating upgrade. In 1998, India was downgraded from BB+ to BB even though the growth rate was high by 200 basis points. The reason unstated was the Pokhran II blasts. Subsequently, India was upgraded to BB+ in 2005 and BBB- in 2007. As per the SBI study, with BBB- rating, India has only a 5% probability of a rating upgrade.

The unavoidable conclusion is that the rating agencies adopt different criteria while rating a country — as is evident from the SBI study of the changes in ratings of developed and developing countries. The developed countries have occupied the top notches and have hardly seen any downgrades despite slippage in macros. In contrast, the developing countries have witnessed a larger number of downgrades and fewer upgrades — and that in the lowest brackets.

Views of rating agencies

Das has reasons to feel unhappy with the S&P bias. In this, the named agency is not alone. In September, Moody’s had said that a rating upgrade for India would not be possible before another couple of years. This was just ahead of the agency’s representatives meeting finance ministry officials. Indian policymakers were miffed at Moody’s making such a statement even before meeting them. Das had told the representatives that he had serious concerns regarding the agency’s methodology. He told them that, under the circumstances, the meeting was “completely irrelevant and superfluous”.

S&P, in its latest rating exercise, expects Indian economy to grow 7.9% in 2016 and 8% on an average over 2016-2018. It also expects the current account deficit to be at 1.4% of the GDP in 2016 and the RBI to meet its inflation target of 5% by March 2017. But the agency was stuck as the government debt stuck at 69% of GDP, higher than the 60% ceiling the agency holds as sacrosanct.

Economic performance of late

Early results from 510 corporate houses, however, indicate that growth is returning after 7 consecutive quarters of decline. It seems that the increased demand for products ahead of the season, the Pay Commission hikes and a good monsoon are helping India Inc’s fortunes. However, the large companies have yet to come out with their results.

1-automotive-industry-indiaIn addition, the Nikkei India Manufacturing Purchasing Managers’ Index has hit a 22-month high. There have been higher auto sales in October. All these indicate better prospects for the economy. What is more, the core sector grew 5% in September 2016, up from 3.7% in September 2015. Add the falling inflation, recent RBI interest rate cuts and rise in non-food credit — there are reasons for a positive sentiment.

The decision of the rating agencies to keep India’s rating unchanged and also just one notch improvement in the World Bank’s Ease of Doing Business Index (from 131 to 130) are two dampeners to the mood of the government. Evidently, India needs to work further and wait longer to win over the external judges to certify the good works done.

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Sugato Hazra
Sugato Hazra
Public policy analyst based in Delhi

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