Rating agencies’ methodologies come under questioning

STATING THE case of China, which has seen an improvement in its credit rating even as its “credit boom has unfolded and growth has experienced a secular decline”, the Economic Survey has questioned the methodology of rating agencies at a time when India’s ratings have remained stuck at a much lower level for last few years.

“In 2009, China launched an historic credit expansion, which has so far seen the credit-gdp ratio rise by an unprecedented about 63 percentage points of GDP, much larger than the stock of India’s credit-gdp. At the same time, Chinese growth has slowed from over 10 per cent to 6.5 per cent. How did Standard and Poor’s react to this ominous scissors pattern, which has universally been acknowledged as posing serious risks to China and indeed the world? In December 2010, it increased China’s rating from A+ to AA and it has never adjusted it since, even as the credit boom has unfolded and growth has experienced a secular decline,” the Survey stated.

In contrast, the Economic Survey noted that India’s ratings have remained stuck at the much lower level of BBB-, despite the country’s “dramatic” improvement in growth and macro-economic stability since 2014. “These contrasting experiences raise a question: can they really be explained by an economically sound methodology?” the Survey mentioned.

In November, 2016, the Standard & Poor ruled out the scope of a ratings upgrade for India, mainly on the grounds of its low per capita GDP and relatively high fiscal deficit. “The actual methodology to arrive at this rating was clearly more complex. Even so, it is worth asking: are these variables the right key for assessing India’s risk of default?” stated the Survey.

The Survey first questioned the use of per capita GDP as a variable for assessment. It elaborated its stance: “Lower middle income countries experienced an average growth of 2.45 percent of GDP per capita (constant 2010 dollars) between 1970 and 2015. At this rate, the poorest of the lower middle income countries would take about 57 years to reach upper middle income status. So if this variable is really key to ratings, poorer countries might be provoked into saying, ‘Please don’t bother this year, come back to assess us after half a century’.”

Then, it questioned the way of using fiscal variables for assessment. “The practice of ratings agencies is to combine a group of countries and then assess comparatively their fiscal outcomes. So, India is deemed an outlier because its general government fiscal deficit ratio of 6.6 per cent (2014) and debt of 67.1 per cent are out of line with its emerging market peers,” the Survey stated.

The Survey also mentioned that India could be very different from the comparators used by the ratings agencies.