FinMin's economists call for urgent reform of credit ratings

In a publication titled "re-examining narratives: a collection of essays", the office of the Chief Economic Advisor in the Ministry of Finance has addressed the critical issue of 'opaque' methodologies employed by credit rating agencies (CRAs) to determine sovereign ratings.  

The publication, released on Thursday, comprises five major essays covering topics such as credit rating agencies, the inequality debate in India, India's evolving export basket, financing climate action, and key outcomes of the 18th G20 summit held under India's presidency.

The first chapter of the collection sheds light on the need for greater transparency in the methodologies of major credit rating agencies, including Fitch, Moody's, and Standard and Poor's.

Finance ministry's economists argue the agencies should base their ratings on hard data rather than relying heavily on qualitative variables, as stated in the collection of essays.

"Our review of the credit rating methodologies reveals that there is considerable reliance on qualitative variables to capture ‘willingness to pay’. The enormous degree of opaqueness in the methodology makes it challenging to quantify the impact of qualitative factors on credit ratings," states the collection.

The economists from the North Block emphasised on the urgency of reform in the credit rating process. They believe that enhanced transparency may lead to the use of hard data, potentially resulting in credit rating upgrades for a significant number of sovereigns.

The ministry highlighted several issues with the current rating methodologies, stating, "First, the methodologies utilised by credit rating agencies are opaque and appear to disadvantage developing economies in certain ways."

The concerns include reliance on high levels of foreign ownership in the banking sector, perceived political interference in publicly owned banks, non-transparent selection of experts for rating assessments, and a lack of clarity in conveying assigned weights for each parameter considered.

The second essay in the collection delves into the opaqueness of ratings but focuses on social inclusion in India. It explores the dynamics of inequality and inclusivity in a developing country, particularly in the context of the COVID-19 pandemic's impact on global inequality levels.

The essay argues for a comprehensive assessment of inequality in India, taking into account the impact of targeted government schemes for food security, health, education, and cash transfers. It advocates for raising economic growth to improve individual income and ensure a decent standard of living for all. The essay supports the government's 'Sabka Saath, Sabka Vikas' initiative, emphasizing the importance of growth-enhancing structural reforms over the past decade.

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