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Economic Survey pokes ratings firms, questions methodology

31 January, 2017

The Economic Survey 2016-17 presented on Tuesday came down hard on credit ratings firms for the methods they use while assigning sovereign ratings to individual countries.

In what is unprecedented for the annual document, which precedes the budget, the survey said that the methodology used by ratings firms like Standard & Poor’s puts poorer countries at a disadvantage.

“…poorer countries might be provoked into saying, ‘Please don’t bother this year, come back to assess us after half a century,’” the survey said, taking a stab at the agencies.

The survey report, prepared by chief economic adviser Arvind Subramanian, recalled that during the US financial crisis, questions were raised about the controversial role of ratings firm in certifying as AAA—or high investment grade—bundles of mortgage-backed securities that had toxic underlying assets.

The survey noted that Standard & Poor’s, in November 2016, ruled out a ratings upgrade for India mainly on the grounds of the country’s low per capita gross domestic product and relatively high fiscal deficit.

It then questioned the actual methodology S&P used to arrive at this rating: “… are these variables the right key for assessing India’s risk of default?”

S&P has a BBB- rating for India, the lowest investment grade and just a notch above junk rating. Moody’s and Fitch also have assigned the lowest investment grade rating for India. Moody’s, too, had retained India’s ratings in November last year.

The Indian government and top officials have previously also criticised ratings firms for not upgrading the country’s sovereign ratings. In fact, the government had aggressively lobbied Moody’s for an upgrade but the US-based firm refused, Reuters reported last month.

The survey continued the government’s tirade against the ratings firms. It said India has a strong growth trajectory, which coupled with its commitment to fiscal discipline suggests its deficit and debt ratios are likely to decline in coming years.

The survey went on to contrast India’s position with that of China, and the way the two countries were rated. “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% to 6.5%,” it said.

However, S&P in December 2010 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 fallen.

“In contrast, 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,” the survey said. “These contrasting experiences raise a question: can they really be explained by an economically sound methodology?”

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Economic Survey pokes ratings firms, questions methodology

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