Why India Rates So Lowly
Standard and Poor’s changed the outlook on India’s credit rating to negative, but kept the rating at BBB. This is just above junk, but the highest India’s been in a while.
There have been a number of Indian commentators who have protested. India has the same credit rating as Croatia, Barbados and Colombia?
The first’s economy is in the negative growth zone. Barbados is so small its population could fit in Rashtrapati Bhavan (plus a few gubernatorial homes) and the last is largely famous for prostitutes who catch the eye of US Secret Service men.
A credit rating of a government, its sovereign credit rating, is supposed to be a measure of its likelihood of default. Even Standard and Poor’s isn’t saying that, though by saying it believes there’s a one in three chance of a downgrade (to junk bond status) it is indicating a fiscal blowout is up there in the realm of possibility.
But most of these Indian grumblings are based on the sheer size of the Indian economy and, perhaps, the fact that much of India’s government debt is held domestically. Mind you, it does have a largish foreign debt that has been growing in recent times – but not as a proportion of GDP.
However, macroeconomic indicators is only part of the basis for such ratings. The other part, though more art than science, is about the credibility of the polity to do the right thing fiscally or otherwise. A final bit is simply the history of the government concerned. As with individuals, your past behaviour is a key determinant of your present credit standing.
Well, the truth is India has a less than great score in all these categories.
One, though its growth figures are doing well, they are clearly suboptimal. And Standard and Poor’s actually has among the most negative assessments of India’s coming GDP figures – just above 5 per cent. What is more important is that India does poorly in most of the measures that default-watchers would pay attention to: international reserves as part of GDP where the amount is good but not great, domestic public debt which is horrendous especially for an Asian emerging market and the current account deficit which jumped sickeningly last year to well above 4 per cent of GDP.
Two, the political system cannot be in worse shape. There isn’t unrest on the streets and so on. But the ability of the government to do anything seems to receding almost monthly. The Manmohan Singh government spends its time mainly finding reasons why it can’t do. From what I gather, the core problem is not Mamata Banerjee or Sonia Gandhi or the Comptroller Auditor General. The higher-up you go and the finger is pointed at Prime Minister Singh himself as the biggest obstacle in the road.
That at least Moody’s got right, noting that his seeming indifference to political developments is a big part of what’s going wrong in India.
Third is the past history of India. Yes, India has never defaulted on its foreign debt. It doesn’t allow more than a few tens of billions of dollars to of government bonds to be held by foreign investors so what’s roiling the Eurozone won’t happen here.
But India does not have a sterling financial past. As Bimal Jalan, former governor of the Reserve Bank of India, pointed out, India has had balance of payments crises almost every year in its first 40 years of its history. Eventually, it couldn’t keep winning this lottery and in1991 saw its external finances go belly-up.
Put it together and I, personally, can see why India’s credit rating hovers just above junk bond. Perhaps it should be one notch higher, but that’s the best New Delhi deserves.