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India’s current credit rating does not reflect the stability of the economy
Posted:May 16, 2017
 
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The Economic Survey 2016-17 brings out a bias in perception about the Indian economy by international Credit Rating Agencies (CRAs). Recently, chief economic adviser Arvind Subramanian reiterated the inconsistent standards of CRAs, particularly dealing with India and China. For example, S&P maintained India’s status quo at BBB- (moderate credit risk) since 2007 while it has upgraded China from A+ to AA- (high credit quality) in 2010; even though macroeconomic fundamentals of India has improved in past few years.
 
International ratings play an important role for governments and companies in emerging countries like India to raise capital in the international financial market.
 
A lower credit rating means higher cost of borrowing through risk premium and lower investors base.
Since 2007, the Indian economy has shown improvement in the most relevant macro indicators. The foreign direct investment (FDI) inflows have almost doubled from $22.8 billion in 2007 to $55.56 billion in 2016.
 
The primary deficit, the difference between receipts and non-interest expenditures, has decreased from 4.5% in 2009-10 to 1.6 % GDP in 2015-16.
 
Further, current account deficit (CAD) to GDP has significantly fallen from 4.8% in 2012-13 to 1.1% in 2015-16.
 
The most important factor, the debt to GDP ratio, is improving gradually, falling from 74% in 2007 to 68.5% in 2016.
 
India’s debt is mostly dominated by internal public debt with little share of external debt.
 
India’s debt ratio is substantially lower compared to countries such as Japan, Singapore, US and Spain with debt ratio of 239.2% 112%, 107% and 99% respectively, in 2016.
 
Therefore, not upgrading India’s rating is not justified when the economy is growing at more than 7% in a country which has never defaulted.
 
However, there are concerns that the economies of China and India are not comparable. First, the significant fall in CAD was mainly due to falling oil prices from $106 per barrel in July 2014 to $26 in January 2016. Lower oil prices not only helped reduce CAD but also helped improve fiscal balance by 1% of GDP through lower petroleum related subsidies and higher excise duties. The fiscal consolidation also got a push from spectrum auction in March 2015, which generated approximately Rs1.10 lakh crore for the government.
 
Oil prices have picked up quite substantially in the last one year and are expected to continue their trend, therefore negatively affecting both current account and fiscal balance. Recently, the Fiscal Responsibility and Budget Management Committee (FRBM) has emphasised on attaining 60% Debt/GDP ratio by 2023, contrary to the demand of CRAs for lower threshold level, which has given the rating agencies the leverage not to upgrade India’s ratings. The revised GDP estimates with 2011-12 base-year and CPI based inflation is under scanner.
 
Further, the ratio of foreign exchange reserves to total debt has decreased from 115.6 in 2007 to 74.2 in 2016 where as external debt to GDP ratio also increased from 17.5% to 23.7%.
 
China’s general government debt to GDP ratio has been steadily increasing every year but it still stands very low at 46.2 as of 2016. China’s foreign exchange reserves, mostly due its trade surplus, amounts to 240% of total external debt in comparison to India’s 73% in 2015.
 
China had mostly fiscal surplus in last two decades whereas India always had large fiscal deficit. India’s total receipts are still not sufficient to meet non-interest payment expenditures. Similarly, China had current account surplus in the last 25 years while India ran CADs for most of the period except 2001-03.
 
So India is not China. However, India deserves an upgrade in its rating in its own right without comparing with others. The current ratings of BBB- does not truly reflect the stability of Indian economy, improved macro fundamentals, and its ability and willingness to repay its debt.
 
Hindustan Times, May 17, 2017
 
 
 
 
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