India Finds Treatment by Credit Rating Agencies Unfair
India is Asia’s third largest economy – behind China and Japan. However, when compared to China, its credit rating has always been on the poorer side. At present China is rated AA- by ratings major S&P Global Ratings. Meanwhile, India is rated BBB-, six rungs below China.
The Indian government raised this issue in the ‘Economic Survey 2016-17’ which was released a day before the annual Budget presentation on February 1.
Titled ‘Poor Standards? The Rating Agencies, China & India,’ the report noted that “In recent years, the role of ratings agencies has increasingly come into question.” It invoked the top-notch ratings provided on toxic asset laden mortgage-backed securities in the US and also said that these agencies were often found reacting to financial crises rather than pre-warning about them.
The graph above has been reproduced from the survey. Pointing to it, the government said that China received an upgrade in December 2010 even though its credit was surging and GDP growth was declining. However, India has not received any upgrade even though its credit growth in proportion to GDP has remained near flat and economic growth has accelerated.
S&P responds
S&P Global Ratings defended its methodology and disagreed with claims of inconsistency by the Indian government. Bloomberg reported Kyran Curry, director of S&P Global, saying that “Of course, we have been following the government’s comments made through the Economic Survey pretty closely. We apply the same methodology across the globe and India is no exception.”
The ratings major has pointed to public debt and lack of private investment which is holding back a rating upgrade. On comparison with China, S&P Global points to China’s five times higher per capita GDP as another reason for the difference in ratings.
Investor takeaway
Though India has never been quite happy with its ratings, this marks the first time that it has adopted such an aggressive stance. This is especially in light of S&P’s decision taken in November 2016 not to consider an upgrade for the next two years.
On the government’s part, the rating becomes an irritant when presenting the case of investing in India’s bonds at a time when it is trying to improve its business friendliness and tap the FDI (foreign direct investment) channel and is finding its endeavors bear fruit.
India’s macroeconomic indicators look stable and the country seems impacted by lesser issues than China, Brazil, or even Russia. The country’s equities (INDA) may remain attractive if the country absorbs the impact of demonetization and bounces back towards the end of this year.
