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Why India’s sovereign ratings lag behind China
By Zhou Hao Source: Global Times Published: 2017/2/13
Another case of India, an emerging economy, criticizing global credit rating agencies (CRAs) for unreasonable sovereign ratings has drawn media attention. Only this time, India has chosen to compare its own ratings with another emerging power - China.
In a recent Bloomberg report, Arvind Subramanian, chief economic adviser at the Finance Ministry of India, was quoted as saying "rating agencies have inconsistent standards," and India's recently published Economic Survey 2016-2017 said that Standard & Poor's (S&P) in December 2010 increased China's sovereign ratings from A+ to AA- and has never adjusted it since, which is six grades higher than India's current level of BBB-, even though India has shown dramatic improvement in economic growth and macroeconomic stability since 2014. Being two of the largest emerging economies, the sovereign rating gap India has with China is indeed deep.
If we look into the world's three largest CRAs' ratings for India, it is noticeable that S&P has not adjusted India's rating since 2011, Fitch hasn't done so since 2006, and Moody's hasn't changed since 2004. With its rating left at such a low level for over 10 years, India's dissatisfaction and jealousy toward China seems understandable.
CRAs' rating systems are composed of a series of hard indicators, as well as a variety of flexible ones. Major CRAs have a rating committee, which will determine the rating of a country based on reports from analysts. This whole process can be rather sophisticated and the role those hard indicators play can be quite limited.
On the other hand, the stability of a country's political system can to a large degree affect its final grading, but it is an indicator that cannot be measured in numbers. In addition, if a nation's political environment has remained "super stable" for a long time, the CRAs may also consider other potential invisible risks associated with the country.
Therefore, it is considered less meaningful if India largely attempts to compare itself to China in terms of hard indicators such as GDP and credit-to-GDP ratio, but falls into a cycle of data mining. In fact the most significant functions of a country's sovereign rating lie in two aspects. One determines whether foreign capital will enter the country, and the other is to decide whether the country's bonds can be purchased by international investors.
India's external debt has been kept at a stable level of roughly 20 percent of the country's GDP, demonstrating limited purchasing demand of the country's external debt. In fact, India is an economy that highly relies on internal demand and internal financing systems, which can explain its limited demand in external credit ratings. It is clear that holding a low credit rating for India could lead to a reluctant attitude from international investors toward investing in India. And by looking at the World Bank's Doing Business 2017 report that compares domestic business regulations in 190 economies, India ranked 130th, with subcategories of "enforcing contracts," "paying taxes," "dealing with construction permits," "resolving solvency" and "registering property" among the lowest rankings.
These factors are closely related to the country's legal and land system. If seen from the above angle, India's comparatively low sovereign credit rating is not completely unreasonable. In comparison, China's overall ranking stayed at 78th, which is remarkably higher than that of India.
We could try to interpret India's sovereign rating from another perspective. If foreign capital is willing to move up their investment scale in India, this would exert pressure on the CRAs. After all credit rating is also a business and the CRAs react actively to clients' requests in terms of credit ratings. Instead of being obsessed with the sovereign credit ratings themselves, India should take a more macro view so as to fundamentally find out the underlying problems and solve them.
The author is a Singapore-based senior economist with EM Asia, Commerzbank.
@Shotgunner51 , @Dungeness , @GS Zhou , @samsara , @AndrewJin
By Zhou Hao Source: Global Times Published: 2017/2/13
Another case of India, an emerging economy, criticizing global credit rating agencies (CRAs) for unreasonable sovereign ratings has drawn media attention. Only this time, India has chosen to compare its own ratings with another emerging power - China.
In a recent Bloomberg report, Arvind Subramanian, chief economic adviser at the Finance Ministry of India, was quoted as saying "rating agencies have inconsistent standards," and India's recently published Economic Survey 2016-2017 said that Standard & Poor's (S&P) in December 2010 increased China's sovereign ratings from A+ to AA- and has never adjusted it since, which is six grades higher than India's current level of BBB-, even though India has shown dramatic improvement in economic growth and macroeconomic stability since 2014. Being two of the largest emerging economies, the sovereign rating gap India has with China is indeed deep.
If we look into the world's three largest CRAs' ratings for India, it is noticeable that S&P has not adjusted India's rating since 2011, Fitch hasn't done so since 2006, and Moody's hasn't changed since 2004. With its rating left at such a low level for over 10 years, India's dissatisfaction and jealousy toward China seems understandable.
CRAs' rating systems are composed of a series of hard indicators, as well as a variety of flexible ones. Major CRAs have a rating committee, which will determine the rating of a country based on reports from analysts. This whole process can be rather sophisticated and the role those hard indicators play can be quite limited.
On the other hand, the stability of a country's political system can to a large degree affect its final grading, but it is an indicator that cannot be measured in numbers. In addition, if a nation's political environment has remained "super stable" for a long time, the CRAs may also consider other potential invisible risks associated with the country.
Therefore, it is considered less meaningful if India largely attempts to compare itself to China in terms of hard indicators such as GDP and credit-to-GDP ratio, but falls into a cycle of data mining. In fact the most significant functions of a country's sovereign rating lie in two aspects. One determines whether foreign capital will enter the country, and the other is to decide whether the country's bonds can be purchased by international investors.
India's external debt has been kept at a stable level of roughly 20 percent of the country's GDP, demonstrating limited purchasing demand of the country's external debt. In fact, India is an economy that highly relies on internal demand and internal financing systems, which can explain its limited demand in external credit ratings. It is clear that holding a low credit rating for India could lead to a reluctant attitude from international investors toward investing in India. And by looking at the World Bank's Doing Business 2017 report that compares domestic business regulations in 190 economies, India ranked 130th, with subcategories of "enforcing contracts," "paying taxes," "dealing with construction permits," "resolving solvency" and "registering property" among the lowest rankings.
These factors are closely related to the country's legal and land system. If seen from the above angle, India's comparatively low sovereign credit rating is not completely unreasonable. In comparison, China's overall ranking stayed at 78th, which is remarkably higher than that of India.
We could try to interpret India's sovereign rating from another perspective. If foreign capital is willing to move up their investment scale in India, this would exert pressure on the CRAs. After all credit rating is also a business and the CRAs react actively to clients' requests in terms of credit ratings. Instead of being obsessed with the sovereign credit ratings themselves, India should take a more macro view so as to fundamentally find out the underlying problems and solve them.
The author is a Singapore-based senior economist with EM Asia, Commerzbank.
@Shotgunner51 , @Dungeness , @GS Zhou , @samsara , @AndrewJin
