Confusing signals are floating around from global rating agencies on India’s economic picture. Moody’s thinks the economy deserved a sovereign rating upgrade, it did so, S&P (Standard and Poor’s) didn’t think India is worthy of a rating upgrade at this point, hence it left the grade untouched. Fitch thinks India’s growth picture has ‘repeatedly disappointed’ because of one-off factors, mainly demonetisation and GST-related disruptions. It slashed the GDP forecast for current fiscal to 6.7 percent from 6.9 percent.
Quite clearly, there is no real conviction among raters about India’s state of the economy. This isn’t unexpected. However, regardless of the rating action/ change in growth forecasts and despite the confusion among the current state of the economy, the common factor in all these assessments is that India is poised for a better future on account of the structural reforms being undertaken such as roll out of a unified indirect tax regime, bankruptcy code and formation of an independent rate-setting panel.
Often, an unfavourable comment or rating action has prompted Indian government to confront the particular rater with counter-arguments questioning their methodology. This happened even during the most recent S&P decision not to up India’s sovereign rating. The Narendra Modi government immediately responded to the S&P rate action calling it "unfair". Earlier also the government has criticised the rating agency for not giving upgrade. For instance government’s chief economic advisor, Arvind Subramanian had expressed his unhappiness with rating agencies including S&P for not giving India a rating push saying that these agencies have poor standards.
Are such confrontations really warranted? The world has stopped taking raters seriously particularly after the 2008 financial crisis originated with the collapse of Lehman Brothers. None of the rating agencies, including the big three, could warn the world about the impending economic disaster that has been building over years. In India too, rating agencies have been fighting a big trust deficit on account of what is normally called as ‘rating shopping’ or the practice of rating agencies awarding high rating to an undeserving company to capture business and beating competition. In an interview given to Mint newspaper in August, 2011 (read here), Icra Ltd, one of the Indian rating agencies, came down heavily on the industry for making compromises to win business. “Some of the issues relating to excessive competition are possibly resulting in some rating agencies taking a liberal interpretation of the principles, which are well established internationally,” Icra managing director and chief executive officer Naresh Takkar told the paper without naming any particular rating agency.
Ratings awarded by such agencies are typically used by investors to assess the financial health and credit worthiness of a company. If a company has high ratings, its borrowing costs come down accordingly. Similarly, if a company commands low rating, investors look it with suspicion. The same goes true for a country also. But in the case of a company rating, it is up to the company whether to accept or reject a particular rating from an agency, leaving room for rating shopping. Of course, as per the regulatory norms, the rating agency can still put up the rejected rating on its website in a certain category. But, when it comes to sovereign rating, there is hardly any choice for the particular country to accept or reject the rating. The announcement is made globally and the audience is not confined to that particular country.
How India should welcome an unfavourable rating action/comment? Not with confrontation certainly. It gives the country rogue image. The best way is not to attach too much importance for a rating assessment and accept it graciously as one of the many views. Constant self-assessment and course correction wherever needed would work better than looking for cues from outside and picking up fights when you don’t get the desired outcome. Right now, the Indian economy has both positives and negatives. A rating agency doesn’t need to tell the government that economy is gripped with structural problems on the ground, including disturbing level of unemployment, bad loan menace in the banking sector and falling private investments. On the positive side, the structural reforms being undertaken such as GST and banking reforms will set the stage for future growth. India knows its strengths and weaknesses. Don’t take the raters too seriously.
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Updated Date: Dec 05, 2017 12:57:04 IST