Soon after the Pokharan nuclear tests in May 1998, global credit rating agencies such as Standard & Poor’s and Moody’s downgraded India’s sovereign credit rating from investment grade to junk. Finance Minister Yashwant Sinha criticised the “prophets of doom”, but the downgrade did not matter very much — the government’s firms went out and borrowed foreign currency at relatively competitive rates. The government and the Reserve Bank of India, then headed by Bimal Jalan, also designed two schemes — Resurgent India Bonds in 1998 and, a couple of years later, India Millennium Deposits — to bolster India’s currency chest and confidence. The Atal Bihari Vajpayee government also sent a strong note to the rating agencies on their approach towards India — leading to a virtual breakdown after major disagreements over several metrics.
Agencies such as S&P, Moody’s and Fitch Ratings rate hundreds of sovereign countries. Typically, the ratings are based on economic growth and prospects; the ability to repay debt obligations on time; the level of public debt, especially compared to peers; political stability which, in turn, is believed to have the potential to lead to economic and institutional reforms; strength of the financial sector and banks; monetary policy and the size of foreign exchange reserves, which determine the ability to repay foreign debt, etc. During that period of frosty relations, there was little engagement between the agencies and the government — officials refused to meet with representatives of the agencies, who had to be content with meeting only RBI officials.
By 2002, however, there was recognition within the Finance Ministry that ignoring the rating agencies was not going to help. The job of repairing relations was begun by U K Sinha, the former chairman of Sebi, who was then the joint secretary in charge of capital markets. Officers who followed Sinha widened the process of engagement with the agencies, and nudged them to meet, apart from corporates, finance and non-banking finance companies, economic research agencies and institutions, and to travel to different parts of the country, for instance to Bengaluru, where the information technology sector was booming.
For India, these sovereign ratings are, in a way, unsolicited — but they are important from the perspective of investors who may be looking for an independent assessment from an external agency, or for those investing in debt. This is why, for companies in India that borrow abroad, the rating matters, because the benchmark is linked to the sovereign, or the country’s rating.
By the end of 2003, when Jaswant Singh was Finance Minister, India’s foreign exchange reserves topped $ 100 billion, and the current account recorded a surplus, prompting the government to pay ahead of schedule part of its foreign debt under bilateral agreements. And by January 2004, as the NDA government got into election mode, Moody’s upgraded India’s rating from Ba1 to Baa3, indicating that it was now “stable”.
Yet, over the last decade, as the size of the country’s economy and its foreign exchange reserves have grown and many sectors have been deregulated, the reluctance of the agencies to raise India’s credit rating has miffed successive governments. The 2008 financial crisis — when the agencies were widely criticised for failing to foresee the housing mortgage collapse — added to the distrust. As the agencies’ credibility took a beating, and abundant capital flowed to emerging markets, actions taken by the raters were seen as having only limited impact.
Indeed, in a way, a disconnect has been visible between the ratings and the perception and investment behaviour of foreign investors in Indian stocks and debt. As has been pointed out in this newspaper, since the last Moody’s upgrade in January 2004, India has attracted cumulative foreign direct investment flows of close to $ 250 billion and net portfolio investments of over $ 225 billion into stocks and debt, while foreign exchange reserves have risen to $ 400 billion in what is now a $ 2.3 trillion economy. The boom in flows even this year is perhaps a reflection of how foreign investors are far more positive about India’s economic prospects than local investors, who worry about the mountain of corporate debt and bad loans of banks, and the state of small and medium units.
As in the past, the rating agencies were under the cosh just a few months ago. In May 2017, then Economic Affairs Secretary Shaktikanta Das criticised the global rating agencies for being detached from ground realities in India, and suggested that they introspect. Days later, Chief Economic Advisor Arvind Subramanian described the discrepancy in the agencies’ assessment of India and China as “one of the most egregious examples of compromised analysis”, and asked mockingly, “…The ratings agencies have been inconsistent in their treatment of China and India. Given this record — what we call Poor Standards — my question is: why do we take these rating analysts seriously at all?”
The CEA’s possibly rhetorical question is, in fact, very pertinent. Amidst the celebratory mood that has followed the upgrade by Moody’s on Friday, an earlier proposal to have a rating agency promoted by BRICS nations has not been discussed. Former Finance Minister P Chidambaram has pointed out that the “dashboard is flashing red” on the three key indicators of the health of the economy — gross fixed capital formation and private sector investment; credit growth, especially for small businesses; and jobs — and getting those going again might, in fact, mean “not taking raters seriously”. The impact of economic and institutional reforms is visible with a lag — it remains to be seen whether the current regime is still in power when the next upgrade comes.