India's chief economic advisor KV Subramanian has hit out against sovereign ratings agencies arguing that India's strong economic fundamentals is not reflected in its overall ratings. While presenting the Economic Survey for 2020-21, Subramanian said India's ability and willingness to pay its debt is second to none in the world and the ratings should reflect that.
India was rated at BBB-/Baa3, the lowest rung of investment grade by credit rating agency Moody's in June 2020. In the ratings charts, Moody's ranks Aaa/Aa3 for countries that have the highest quality , A1/A3 as those with strong payment capacity. India is ranked in the lowest rung of the batch that is classified as those with adequate paying capacity.
"India's sovereign ratings do not reflect the fundamentals of Indian economy. Ratings methodology needs correction," Subramanian said. "Ratings basically reflect the probability of default which corresponds to willingness to repay or ability to repay. India's willingness to repay is gold standard. India has never defaulted even in 1991. Our ability to repay is also very very high."
Subramanian pointed towards India's bulging foreign exchange reserves to make the case for a significant ratings upgrade. The reserves currently stand at $585 billion, which is close to all time highs.
"To understand whether our reserves cover our debt, we need to take into account private sector debt. Our short term debt, a default by India is a 0.1 percent probability event," he said. "Our total debt obligation in foreign exchange, the amount is less than reserves. Which is why India should have the highest rating. And that is one of the reasons why our stock markets do not react to (adverse) credit ratings changes."
In the survey, Subramanian elaborated on this. India's non-government short term-debt as per cent of forex reserves stood at 19 per cent as of September 2020, which means India's forex reserves can cover an additional 2.8 standard deviation negative event, an event that can be expected to manifest with a probability of less than 0.1 per cent after meeting all short-term debt.
"India's forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India's total external debt (including that of the private sector) of US$ 556.2 bn as of September 2020. In corporate finance parlance, therefore, India resembles a firm that has negative debt, whose probability of default is zero by definition," the survey says. "Despite this compelling statistic, India is an inexplicable outlier in its ratings cohort. The Survey's findings are consistent with a large academic literature that highlights bias and subjectivity in sovereign credit ratings, especially against countries with lower ratings."
This isn't the first time when the country's chief economic advisor has lashed out at ratings agencies. In 2017, the then CEA Arvind Subramanian lost his cool while explaining why his
GDP estimates for that year ought not be compared with those dished out by the IMF or ratings agencies like Standard & Poor, Moody's or Fitch.
"The ratings agencies do not reflect the real state of an economy. They follow inconsistent standards. We actually call it poor standards (pun intended)," he had then said. "They have used astonishingly inconsistent parameters to judge India and China. The Indian economy is robust and strong and we have taken so many reform measures. China is the single biggest risk to the world economy at large. Yet they did not downgrade China but actually gave them an upgrade while India's rating remains stable. We should question them and have a little fun (at their expense)."
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