India must tackle its high fiscal deficit and contingent liabilities if it is to seek a sovereign credit rating upgrade.
As has been long contested by India, global ratings agency Moody’s today finally downgraded China’s sovereign rating by one-notch, bringing the Asian down to a ‘low credit risk’ profile, from ‘very low credit risk’ profile earlier. India has repeatedly slammed ratings agencies for their inconsistent treatment while rating India and China.
Chief Economic Advisor Arvind Subramanian had contested that they have consistently refused to upgrade India’s sovereign rating despite significant improvement in economic fundamentals over the years. At the same time, he had blamed the ratings agencies for favouring China, even upgrading it, regardless of the country’s deteriorating fundamentals.
Now, as the giant Chinese sovereign is downgraded to A1 from Aa3, and India’s economic activity picks up pace, led by Prime Minister Narendra Modi’s reform programmes, is India a step closer to be at the same rating level with China? Probably not. India, at the lowest investment grade Baa3 on Moody’s rating scale, is still five notches below China’s A1 (even after today’s downgrade).
“Ratings agencies rate the country’s singularly on the basis of the country’s ability to service the debt. India’s ratings are not good because its fiscal deficit is very high,” Rajiv Kumar, Senior Fellow, Centre for Policy Research, said in a conversation with FE.
The ratings agencies take into account the deficit at the centre, in the states, all the outstanding contingent liabilities including those with the public undertakings, external debt, etc, Kumar said, adding that India must not hope for a rating upgrade unless it shows improvement in fiscal management and more transparency in budgets and accounting.
On its part, India had pointed out other countries including Japan and Portugal, which had better ratings despite their debts being double the size of their economies, compared with India’s 66.7%, Reuters had reported earlier last year citing correspondence between India’s Finance Ministry and the ratings agency.
However, Moody’s had refused to upgrade India’s rating citing concerns over India’s high debt burden in comparison to the other countries with similar rating. It had also raised concerns over India’s low debt affordability, Reuters had reported. India’s debt, which has fallen to 66.7% of GDP from 79.5% in 2004-05, is still considered high among the comparable peers.
This is probably why India, despite trying hard to make its case, could not secure a sovereign credit rating upgrade — due to its high fiscal deficit, which is at about 7%, states and centre put together. Three well-known ratings agencies, Standard & Poor’s, Fitch and Moody’s have not changed their ratings on India for at least over a decade. Moody’s has kept its Baa3 rating on India since January 2004; Fitch has kept India at the lowest investment grade rating of BBB- since August 2006; while S&P has maintained its BBB- rating on India since January 2007.
What must India do?
Sure enough, Moody’s today’s downgrade of China’s rating too is on the back of concerns over rising debt. “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” it said in a statement today.
The country must rein in expenditure and improve revenue too, to tackle not only its primary deficit, but also the tax-GDP ratio, Rajiv Kumar said. While a good economic growth may help improve the ratios in question, Rajiv Kumar said that a rising debt may negate that effect.