The rating agencies have never been kind to India. Through the nineties when we were growing at more than 6%, we were regarded as below investment grade. It took several years of growth of 8-9% for S&P to upgrade us to investment grade in 2007. Today, we are BBB-, just one notch above below-investment grade, the same as Iceland (which went through a frightful financial crisis recently). We are two notches below Ireland (yet to recover from a banking crisis) and Spain, which has just received a bailout. Beats me.
Now, S&P has warned India of a possible downgrade further ahead unless it gets its act together. India's external debt to GDP of 3.4% is among the lowest in the world. We have not defaulted on our foreign obligations all these years and are unlikely to do so even if growth slows to 6% in the next year or two years. We are among the few nations whose debt to GDP ratio has declined in recent years. What, then, is the basis for S&P's warning?
I visited the S&P website to understand their rating methodology for sovereigns. They use a combination of political, economic, external, fiscal and monetary scores. Even if one parameter, the external score, looks good,your rating can go down if the other scores worsen. Let's say that an unwieldy coalition looks likely to assume power in Delhi. The political score would worsen and you could get a downgrade- so I understand their methodology.
In India's case, this approach looks suspect because the link between a worsening of various scores and default probability is weak. Politics could get more contentious; reforms may grind to a halt; the monetary authorities may not have room to lower interest rates. But this does not increase the probability of default on foreign obligations because external debt is so low.
This is not the only argument I would make. I do not believe that the link between political regimes or even economic regimes and growth in India is all that strong. If the global situation improves, the present set of reforms could easily give us 7.5-8% growth; if the global situation remains bad, some of the reforms people are talking about will not make a big difference.
More in my ET column, S&P, India Inc overdoing gloom.
13 comments:
One thing to factor in, is that many times countries that default don't necessarily default because they can't pay. There could be other factors like corruption, lack of accountability, lack of depth in institutions, or just a disregard for creditors. If those factors are ignored, any country that prints its currency would never default and credit ratings would not be needed.
If a country's fate is not in its own hands but dependent entirely on the global economy, as you say in your last para, it seems there is something really bad about that.
Awesome Blog i have never seen this much blog keep it on.
even a layman can say that India's growth would remain 0% for the coming years if they dont want to bring any change....losers Indians
For once I agree with you. The rating agencies have no edge in rating anything other than bonds issued by old line industrial companies. At any rate, India has never defaulted in 60+ years of existence as a free country--that should count for something when gauging intent.
However, that does not mean that India is in for some rough sledding for the next few years, perhaps more. Unless we can find a way to address our oil import bill problem--global depression?--we are in trouble. Longer run I think natural gas revolution will dampen global oil prices.
Srini
Global scenario will only worsen as they wldn't be able to pay the debt any time soon. So r u then trying to say that India is going to doom despite passing reforms like FDI in retail, GST etc..
i am an expat from uk who just returned to india for good last year. the india growth story is definitely exaggerated and more a myth. I am seriously stressed every day as to why the hell i returned to this country.
I am not an expert but it seems to me that the ratings have one purpose: ram through retail FDI. They also assist capital flight, which exacerbates INR depreciation wrt USD, which then depresses India's oil demand, so that more is left over for the West. What's not to like in this setup?
The post is very informative. It is a pleasure reading it. I have also bookmarked you for checking out new posts.
Thanks for writing in such an encouraging post. I had a glimpse of it and couldn’t stop reading till I finished. I have already bookmarked you.
The post is handsomely written. I have bookmarked you for keeping abreast with your new posts.
This is a Great Job..! I even told my friends to take a look at your blog and in fact your blog is already bookmarked on my computer. Hope to see more of this. Great!!!
Great article content. You bring up sensible thoughts with which I mostly concur. Your thought-provoking writing style is unique and refreshing. Thank you for writing interesting content for smart readers.
buy youtube views
A very well-written post. I read and liked the post and have also bookmarked you. All the best for future endeavors.
Post a Comment