India needs to make efforts to get rating upgrade in line with fundamentals, says CEA K V Subramanian

India will have to persistently make efforts for improvement in its sovereign rating by different global agencies in line with its economic fundamentals, Chief Economic Adviser K V Subramanian said on Saturday.

The Economic Survey presented in Parliament on Friday expressed concern over lower sovereign rating assigned by agencies like Fitch, S&P and Moody’s to India despite its strong economic fundamentals.

“We have made the case very very forcefully (to rating agencies)…These changes happen over time. They don’t happen instantaneously, but you have to continue making efforts,” he told PTI in an interview.

The Survey said sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations, and suggested that developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology.

“Never in the history of sovereign credit ratings has the fifth largest economy in the world been rated as the lowest rung of the investment-grade (BBB-/Baa3). While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows,” the survey said.

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.

Global ratings agencies have the lowest investment-grade rating on India, which is just above the junk status.

In June, Fitch Ratings revised India’s outlook to ‘negative’ from ‘stable’ and affirmed the rating at ‘BBB-‘, stating that the coronavirus pandemic has significantly weakened the country’s growth prospects for the year and exposed the challenges associated with a high public-debt burden.

Moody’s Investors Service had downgraded India’s sovereign rating to ‘Baa3’ from ‘Baa2’, saying there will be challenges in the implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.

S&P Global Ratings retained the ‘BBB-‘ rating for India for the 13th year in a row in June last year.

Quoting Bengali poet Rabindranath Thakur “Where the mind is without fear and the head is held high Into that heaven of freedom, my Father, let my country awake”, the survey said it is imperative that sovereign credit ratings methodology be made more transparent, less subjective and better attuned to reflect economies’ fundamentals.

As ratings do not capture India’s fundamentals, the survey said that past sovereign credit rating changes for India have not had a major adverse impact on select indicators such as Sensex return, foreign exchange rate and government securities yield.

Stating that there is a bias against emerging giants in sovereign credit ratings, the survey said India has been an outlier in terms of GDP growth rate, inflation, general government debt, political stability, rule of law, control of corruption, investor protection, ease of doing business, short-term external debt (as per cent of reserves), reserve adequacy ratio and sovereign default history, for the last decade.

“Within its sovereign credit ratings cohort countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s India is a clear outlier on several parameters, i.e. a sovereign whose rating is significantly lower than mandated by the effect on the sovereign rating of the parameter,” it said.