Arvind Subramanian's searing criticism: Why do we take rating agencies seriously at all?

Bengaluru - Slamming global credit rating agencies for not upgrading India despite clear improvement in its economic fundamentals, Chief Economic Adviser Arvind Subramanian on Thursday day said they are following “inconsistent” standards while rating India and China. India has been placed in the lowest investment grade by these agencies which leads to higher cost of borrowing in the global markets due to investor risk perceptions associated with it. [caption id=“attachment_2399194” align=“alignleft” width=“380”]  Chief economic advisor Arvind Subramanian. PIB[/caption] “In recent years, rating agencies have maintained India’s BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance). At the same time, China’s rating has actually been upgraded to AA-, even though its fundamentals have deteriorated,” he said here. “In other words, the ratings agencies have been inconsistent in their treatment of China and India. Given this record — what we call Poor Standards – my question is: why do we take these rating analysts seriously at all?,” he said. Citing example of the sub-prime crisis, he said questions were raised about their role in certifying as AAA bundles of mortgage-backed securities that had toxic underlying assets in the US financial crisis of 2008. Similarly, their value has been questioned in light of their failure to provide warnings in advance of financial crises, he said. Delivering VKRV Memorial Lecture, he said, on the domestic side, there is a clear relationship between expert analysis and official decisions. “Before policy decisions, the expert analysis is often illuminating. But once the decisions are taken, it is truly striking how the tune and tone of the analysis changes. Analysts fall over backwards to rationalise the official decision,” Subramanian said. Economic Affairs Secretary Shaktikanta Das had also expressed dismay last week saying that global rating agencies are far detached from ground realities and must introspect as the reforms initiated certainly warranted an upgrade. In past too, India has questioned the methodology used by them saying that the country compares favourably with other emerging countries on metrics such as default risk. In particular, it has pointed to S&P Global Ratings keeping China at AA- despite rising debt and slowing growth while India has been kept at just one step above junk. Moody’s and Fitch too give similar rating citing Asia’s widest fiscal deficit as a drag on the nation’s sovereign rating.