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. One step above junk, this is the highest India has been rated in a while.

A number of Indian commentators have protested. India has the same credit rating as Croatia, Barbados and Colombia? Croatia’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 Colombia is largely famous for its prostitutes who boast US Secret Service men as clients.

The 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 India will default, though it is saying there’s a one in three chance of a downgrade (to junk bond status), thus indicating a fiscal blowout is in the realm of possibility.

Most of the Indian grumblings against the rating 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 are 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.

First, 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 (India’s figure 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).

Second, the political system could not 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 be receding almost monthly. The Manmohan Singh government spends the majority of its time finding reasons why it can’t do something. From what I gather, the core problem is not Mamata Banerjee or Sonia Gandhi or the Comptroller Auditor General; the higher up you go, your finger ends up 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. True, India has never defaulted on its foreign debt. It doesn’t allow more than a few tens of billions of dollars of government bonds to be held by foreign investors, so what’s rolling the Eurozone won’t happen here.

But India does have a sterling financial past. As Bimal Jalan, former governor of the Reserve Bank of India, pointed out, India had balance of payments crises almost every year in the first 40 years of its history. Eventually, it couldn’t keep winning this lottery, and in 1991 its external finances went belly-up.

Put it all 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.

Copyright © 2012 the Hindustan Times.