CEA Nageswaran Bats For Overhaul Of Sovereign Credit Rating System, Proposes New Method Involving Historical Debt Repayment Record

Despite advancing from the 12th to the fifth-largest global economy over 15 years, India's economy still holds the lowest investment grade assigned by credit rating agencies.

The economic advisors of the finance ministry have expressed their disappointment over the low rating, attributing it to the excessive dependence of rating agencies such as Standard & Poor's, Fitch Ratings, and Moody's Investors Service on qualitative parameters.

They have rebuked the imbalanced strategy of developed countries in funding climate change initiatives and sharing the duty with developing nations to decrease carbon emissions.

The views of Chief Economic Advisor V Anantha Nageswaran and his team are shared in a publication named 'Re-examining Narratives: A Collection of Essays'.

The advisors identified the uneven distribution of access to education and healthcare as a significant hurdle in reducing inequality.

They recognised, however, that the government has already launched numerous initiatives to close this gap.

The essays, released on Thursday, delve into the structural changes observed in India’s foreign trade, where services have become a pivotal element, leading to a decline in both income and price elasticities of exports.

“The rating of India remained static at BBB- during the last 15 years, despite it climbing the ladders from the 12th-largest economy in the world in 2008 to the fifth-largest in 2023, with the second-highest growth rate recorded during the period among all the comparator economies,” said the North Block think-tank.

"Thereby, any improvement in macro-economic parameters may virtually mean nothing for a credit rating if qualitative parameters are judged to be in need of improvement," the advisors said.

"This has serious implications for developing sovereigns' access to capital markets and ability to borrow at affordable rates," they added.

Having a good credit rating amounts to nothing if there is a need for enhancement in qualitative parameters.

The collection of essays criticised over-reliance on “non-transparent” qualitative factors in sovereign rating, including perceptions, value judgements, views of a limited number of experts, and surveys with “loose methodologies”, which it argued results in unacceptable outcomes globally.

This has serious implications for developing sovereigns' access to capital markets and ability to borrow at affordable rates, they said.

"It makes the rating of developing countries almost invariant with respect to even sizeable movements in relevant macroeconomic fundamentals. This happens because the base rating, estimated through quantitative scoring of macro-fundamentals, is overridden by qualitative considerations while finalising the published ratings," the CEA and his team said.

"The set of loose qualitative information fed into the quantitative scoring of countries and the final qualitative overlay, based purely on the agency’s subjective assessment of the countries’ ability and willingness to pay, become heavily loaded against the developing countries," they said.

The CEA and his team suggested a different method for determining credit ratings.

"A nation that has not defaulted throughout its external debt history and through the vicissitudes of its socio-economic development should be taken as fool-proof in its ‘willingness to pay’ back," they proposed.