The Economic Survey 2020-21 takes a leaf out of the proverb 'the best defence is a good offence' to hit out at global credit rating agencies.
In a strong note, the Economic Survey 2020-21 says that country's fiscal policy must not remain beholden to a noisy and biased measure of India's fundamentals and should instead reflect Gurudev Rabindranath Thakur's sentiment of a mind without fear.
Currently, India is rated investment grade by three major rating agencies - S&P, Moody's and Fitch. Post Covid, Moody's has retained a negative outlook on India's rating. Fitch had also changed the outlook to negative. S&P had, however, reaffirmed its rating and outlook.
But there is a strong possibility of India's credit rating rating falling below the investment grade, which means higher cost of overseas funds, global fund outflows, currency depreciation and also impact on country's stock markets.
Post the pandemic, India's financial position deteriorated with higher fiscal deficit, rising government borrowings and falling revenues.The GDP is expected to contract by 7-8 per cent in 2020-21. The public debt to GDP is also expected to cross 80 per cent mark. These are some of the parameters which will influence India's rating in the short term.
The government always try its best to convince rating agencies by spelling out reforms agenda and the fiscal consolidation path, but the current survey clearly hits out at them for not looking at India's fundamentals.
The Economic Survey has questioned whether India's sovereign credit ratings reflect its fundamentals, and found evidence of a systemic under-assessment of India's fundamentals as reflected in its low ratings over a period of at least two decades.
The survey makes a strong case that India's fiscal policy should be guided by considerations of growth and development rather than be restrained by biased and subjective sovereign credit ratings.
It also says the 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 crises in future," says the survey.
In the 1990s and mid 2000s period, India's sovereign credit rating was speculative grade. It was upgraded to investment grade by Moody's in 2004, Fitch in 2006 and S&P in 2007. In fact, India's sovereign credit rating downgrades during 1998-2018 were mainly confined to 1990s on account of the post-Pokhran sanctions in 1998. Whereas India's sovereign credit ratings upgrades, says the survey, have mainly been witnessed in the second half of 2000s, in recognition of higher economic growth prospects and strengthened fundamentals of the Indian economy.