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Bias and subjectivity in India's sovereign credit ratings: Economic Survey

Mansi Jaswal     January 29, 2021

The Economic Survey 2021 has explicitly expressed that foreign rating agencies like S&P, Fitch, and Moody's have remained bias when it comes to sovereign credit ratings of India.

The survey, through various graphical representations, highlighted how credit rating agencies have mostly rated India much below expectation on GDP growth, CPI inflation, and various other parameters in the past two decades.

The Survey 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 defended India's fast-moving growth and called for an overhaul of sovereign rating methodology, saying that the fifth-largest economy can't be BBB- rated.

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"Never in the history of sovereign credit ratings has the 5th largest economy been rated as the lowest rung of investment-grade (BBB -). India's fiscal policy must not remain beholden to a noisy, biased measure of India's fundamentals," the Survey said.

Credit ratings map the probability of default and therefore reflect the willingness and ability of the borrower to meet their obligations.

India's willingness to pay is unquestionably demonstrated through its zero sovereign default history, the Survey said. It also highlighted 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 sovereign and non-sovereign external debt.

"India's forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India's total external debt (sovereign and non-sovereign) of US$ 556.2 bn as of September 2020," the Economic Survey said.

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It added that China has also been railing against the methodology of international rating agencies. It further said rating agencies methodology is suited to developed economies.  "Developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology to prevent exacerbation of crises in future," it added.

The Economic Survey informed that India has already raised the issues with credit ratings in G20. In response, the Financial Stability Board (FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.

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