Introduction
In recent months, the global credit rating of India’s sovereign debt has been a hot topic of debate and concern. The three major global Credit Rating Agencies – Standard & Poor (S&P), Moody’s, and Fitch – have ranked India’s Sovereign Debt just a notch above junk grade, categorizing India as the lowest investment grade. These ratings are contradictory to the sound economic performance and stable prospects of repayment that India has demonstrated. This inconsistency has led to an uproar in the financial and political communities of the country.
The Controversial Ratings
- Standard & Poor (S&P): In May 2023, S&P assigned a rating of ‘BBB’, a notch above junk grade to India.
- Moody’s: Rated India at the lowest investment grade of “Baa3,” like those assigned by S&P- ‘BBB’, in June 2023.
- Fitch: Also ranked India at ‘BBB’, like S&P.
This categorization seems bewildering, especially considering that India has never defaulted in repayments of its sovereign debt, both internal and external.
The Inconsistent Approach of the Agencies
1. Strong Economic Performance
Despite assessing India’s economy as performing well with sound fundamentals underpinning growth over the next two to three years, the rating agencies contradicted themselves by assigning just above junk grade. This inconsistency challenges the credibility of their evaluation.
2. India’s Debt Management
India’s government debt management has been robust, with over 90% of its debt internal and on a fixed interest rate. During PM Modi’s governance, fiscal rectitude has been a hallmark, making India’s debt position stable and sound.
The Importance of Sovereign Credit Ratings
Sovereign credit ratings play a critical role in determining a country’s ability to borrow and the cost of borrowing. These ratings vary from “A” to “D,” with India stuck in the “just about investment” grade for years. This affects the Indian government’s borrowing rate, paying an interest rate of 7.2% on a ten-year sovereign bond compared to much lower rates in Western countries and China.
The rating affects not just borrowing but also foreign direct investment (FDI). Even with a ‘BBB’ rating, PM Modi’s government has managed to break all records in FDI, drawing attention to the questionable accuracy of these global Credit Rating Agencies.
Criticism of Credit Rating Agencies Worldwide
The Big Three, i.e., S&P, Moody’s, and Fitch, collectively rate around 95% of debt, wielding enormous power in the global financial landscape. This influence has not been without criticism:
- Missteps and Errors: Cases like Greece’s false security, wrong calculations of US debt, and the failure to properly evaluate mortgage-based debts have raised questions.
- Corporate Failures: They rated companies like Enron, Lehman Brothers, and AIG as safe investments just days before bankruptcy, showing a lack of insight.
- Conflict of Interest: The ‘user pays’ model, where companies pay for their ratings, creates an apparent conflict of interest, leading to questionable evaluations.
Changing the System in India
The Government of India is considering changing the ‘user pays’ model to ensure the total independence of rating agencies. This move, prompted by the perceived conflict of interest and recent company defaults, could redefine how ratings are conducted in India.
Conclusion
India’s sovereign ratings by global agencies have led to a perplexing situation, where a country with strong economic performance and an unblemished track record in debt repayment is categorized just above junk grade. These contradictory and flawed assessments not only undermine the country’s financial standing but also point to deeper issues within the global credit rating system. Reforms, increased transparency, and a focus on unbiased evaluation could lead to a more accurate representation of India’s true economic potential. It is a call to action for the Indian government, global rating agencies, and the international community to collaborate and ensure that sovereign ratings are a true reflection of a nation’s fiscal and economic strength.
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