A credit rating is an assessment by third party organisation for an entity who is willing to seek a credit rating for itself with respect to a particular debt or financial obligation to assess their creditworthiness i.e. ability to repay the borrowing amount on time. The entity can be individual, company or sovereign government etc. So, a credit rating plays an important role while investors take a decision whether they should buy a particular security or not. Investors always want to invest their money in the highly rated security as those are very less risky.
India’s sovereign credit rating is low compared to other developing counties in the context of its significance to the global economy, strong macroeconomic performance, improving governance and regulation, and strong growth prospects.
In Economic Survey 2016-2017, Dr. Arvind Subramanian highlighted the POOR STANDARDS of credit rating agencies and he also felt that this sovereign rating doesn’t justify the country’s economic growth and has been stagnant for long time. Though Moody’s recently upgraded its rating for India from Baa3 to Baa2 with a stable outlook but still it is low when we compare it with other developing countries.
Except Spain (Developed country) all six countries are developing countries, but their sovereign ratings are better than or equal to India’s. But the question is that why rating agencies are so pessimistic about India that they rated India as the lowest in investment grade except Moody’s. (Moody’s rating is second lowest in the investment grade)
For these we need to know about various determinants which are used by rating agencies to assess a sovereign body. There are various factors economic, social, and political factors that underlie their sovereign credit ratings. In the table there are few economic factors are discussed with a comparative view.
From the table we can see that India is the second highest in both Gross Domestic Product (a sum of private and household consumption(P), investment(I), Govt. expenditure(G) and net export (X-M, export-import)) and Gross National Income (a sum of GDP and net factor income from abroad) among these seven countries but when it comes to per capita measurement, India has lowest value among these seven. So, we can tell that huge population is a major problem of India. As India falls in
lower middle-income category, so its average growth of GDP per capita will be 2.45%. At this rate a lower middle-income category will take 57 years to reach upper middle-income category. Therefore, GDP per capita is very slow-moving variable. So, low per capita income is one of the major reasons for India for getting lower credit rating.
From the table we also see that GDP growth rate in India is the highest among all the six developing countries, though due to some govt. policies growth rate of GDP get declined.
When it comes to Inflation(CPI), it is quite high compared to other developing countries except Brazil and Indonesia. But from 2016 average inflation rate started to decline and record an all-time low at 1.54% in June 2017. Also, the IMF’s inflation forecast for India will be under 5.0% till 2022 which is equal to the other developing economies. Higher inflation is also a drawback for getting lower credit rating.
Budget deficit is a financial health indicator of a sovereign country which indicate how much expenditure exceed from revenue. From the table we can see that India stand 5th in this parameter. It improved from -7.8% in 2009 to -3.5% in 2016 where China degrade in this parameter from -1.1% in 2011 to -3.8% in 2016. Comparatively higher budget deficit causes lower credit rating.
In current A/C balance parameter India is again rank 5th among seven countries. Comparing with Indonesia which carry same rating is also 43% (on an avg. between 2014 and 2016) lower than India. A current account balance is sum of the Balance of trade(difference between export and import),Net factor income from abroad(difference between Gross National Product and GDP or difference between Gross factor income from abroad and Gross factor income to abroad) and Net current transfer (a transaction in which resident entity in one nation provides a non-resident entity with an economic value, such as a real resource or financial item, without receiving something of economic value in exchange). When current A/C balance is positive then it’s called Current A/C Surplus and when negative it’s called Current A/C Deficit.
By debt to GDP ratio it indicates a country’s ability to repay loan with its GDP. Lower the ratio makes ability higher. From table we see the debt to GDP ratio India has highest ratio among all six developing country. Therefore, it is another cause for getting lower credit rating.
Apart from it economic development, political stability, default history are also play an important role for the assessment.
Govt. of India takes initiatives to reform the economy by introducing GST, bankruptcy code, FDI liberalisation etc. These initiatives definitely help India to receive more investment from foreign countries, to improve taxation inefficiency, for better governance and govt. revenues.
Now if we give equal weightage to all nine parameters and measure all countries in a scale of 1 to 7 we will get-
From the table China rank first among all seven countries. If we look again to table of the countries’ credit rating, China’s rating is highest and from this table it is justified.
Though, Spain and Philippines score better than Malaysia but due to 2nd highest GDP per capita and GNP per capita and highest current A/C balance(Surplus) their credit rating is second best among seven countries.
Rating for Brazil is little confusing as it’s score is the lowest, but credit rating is higher than Spain. Brazil has 3rd highest GDP per capita. It ranks 3rd among these countries.
Despite having highest per capita GDP & GNI and being a developed country, Spain ranks 4th among seven countries. Spain has also highest debt to GDP ratio.
Philippines is a developing country and score 2nd highest but due to low GDP, GNI and per capita national income it ranks 5th among these countries. (If we consider all three rating agencies).
Though India rank second in GDP & GNI and highest growth rate of GDP but due to lowest per capita income, high debt to GDP ratio, high current A/C deficit, it ranks 6th among these countries. (As Moody’s recently upgrade their rating for India).
Due to low GDP, low per capita GDP, low per capita national income, high current A/C deficit it ranks 7th.
From this table it is very clear that ‘per capita GDP’, ‘per capita GNI’, ‘current A/C balance’, ‘Debt to GDP ratio’ are playing most vital role in credit rating assessment.
As we mention it before that due being a lower middle-income economy, to improve GDP per capita is too much long-term procedure as it is a very slow-moving variable. Moreover, except Moody’s, other two rating agencies rated India 3-4 years ago. But from past few years India’s economic growth is excellent. They should reassess India based on its present scenario. Finally, they should find out (a) parameter(s) by which they can assess developing (lower-middle income) countries more specifically an emerging country like India apart from per capita GDP/GNI to justify their growth and strength in the economy. For India they should be more focused on socio-economic growth for lower income level category peoples, population control awareness campaign etc.
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