There is an unmistakable rigidity about global credit rating agencies when it comes to their take on India. The sovereign rating of Fitch has been retained at BBB-, just about investment grade.
The concept of credit rating is quite different when it comes to sovereigns. For companies it is straight forward as the agency evaluates the probability of default based on performance parameters.
However, when it comes to a sovereign rating, the overall economic structure is evaluated to gauge whether a country can default. The judgment is hence subjective, as country can always print currency to repay debt even at the risk of running high inflation.
Such an evaluation can be justified if countries have external exposure. However, for India,almost all debt is exclusively in rupees and even participation of FPIs is in rupee bonds. Therefore, there is never a case of forex risk for India. And the ultimate vindication of any country’s credibility is how investors perceive the economy. India is one of the largest recipients of FDI and is also high up on the scale of foreign portfolio investment.
Therefore, if foreign investors are bullish on India, a rating of just investment grade seems an anomaly. These are investors who are actually putting their money on the table and have never had any issue in taking it out, as there is full capital account convertibility there.
The reasons for a rating upgrade are quite compelling. Without making comparisons with other nations, growth of 7 per cent in FY23 and 6-6.5 per cent projected for FY24 is quite impressive. While it is lower than the potential of 8-8.5 per cent, coming out of the Covid blow, the performance is more than commendable.
Second, during the lockdown all nations upped their fiscal deficits in the form of payouts to ensure that people had money to spend. The Indian response was unique in so far as that while revenue was pushed back, expenditure was nuanced. The approach was more through the reform and policy route. As a result India has found it easier to unwind compared with the West.
Using banking channels to provide support helped industry while the guarantee schemes provided assurance to the financial system. Even today, there is determination to revert to the path of fiscal prudence in a minimal time period. In fact, expenditure is being rolled back, like the free food scheme being amalgamated with the food subsidy.
Third, the banking system has rebounded well, using the pandemic period to clean up the books. This means that it is better placed to provide funding to enable the economy to move on to a higher growth path.
Fourth, the RBI has ensured a smoother path to normalcy compared with central banks of other nations. Here the withdrawal of accommodation has worked well and has been done in a non-obtrusive manner.
Also here interest rates have moved without any significant impact on growth. This is important because the kind of volatility that has been witnessed in the US on account of the Fed raising interest rates, has not been seen in India as bond yields have moved in a narrower band. The RBI template can be followed by other central banks. Fifth, the forex situation in India remains strong. Here again the RBI has ensured a couple of things.
First, as the dollar appreciated, the rupee always remained at the median level of depreciation compared with other currencies, which ensured there was no market panic while retaining the competitive edge for exporters. Second, forex reserves, which declined mainly due to valuation issues, has regained its level subsequently with a comfortable import cover ratio of just above nine months. This provides a lot of support to the balance of payments.
Sixth, the quality of government spending is again significant. The Budget has increased the share of capex from around 12-13 per cent pre-pandemic to 22 per cent for FY24. Despite the number of upcoming Assembly elections this year, the Budget has plumped for fiscal prudence.
Seventh, an important development during the year was the way in which India was able to initiate new thinking on the trade front, as seen in the rupee trade agreement with Russia which has now found favour with several countries. This is a major step as these arrangements can help countries move away from the dollar-euro dependence which will add to their economic strength.
While admittedly this is a slow process and will take time to work out, the strategy to go-domestic is a unique model. This needs to be appreciated by the rating agencies as it is a model that several emerging countries will find worth pursuing.
Lastly, India’s strides in digitisation have been remarkable, spanning from banking transactions to the Covid vaccination drive. The digitisation drive has brought about structural changes in the economy making systems more efficient.
In fact, India has carved a unique niche on this front.
Quite clearly the global credit rating agencies seem to be operating with a fixed mindset where it is believed that emerging markets can never really move up the scale. The highest rating that India has achieved is BBB. The CRAs need to reinvent themselves to retain their credibility.
The rating methodologies need to adapt with the times and old shibboleths need to be revisited and changed. Quite ironically the commentary given normally always seems positive and never justifies the low rating awarded.
On the other hand western countries with negative growth rates and higher inflation along with elevated unemployment levels never get downgraded by even a notch. Similarly serious bank failures don’t seem to raise the red flag in these nations. India certainly deserves a fair and unbiased evaluation.
The writer is Chief Economist, Bank of Baroda. Views expressed are personal