India's economic progress faces unfair sovereign credit ratings, despite strong fundamentals. Former NITI Aayog CEO Amitabh Kant criticized ratings by agencies like S&P, Fitch, and Moody's, which use opaque and subjective criteria. India has never defaulted, has robust forex reserves, and is the 5th largest economy, yet remains at the lowest investment grades. Kant advocated for homegrown credit agencies to provide fairer assessments. Addressing this bias in ratings is crucial to unlock funding for India's growth, development, and climate action plans.
In a thought-provoking discussion at the CareEdge Ratings' Conversations 2024 conference, Amitabh Kant, the G20 Sherpa and former CEO of Niti Aayog, shed light on India's remarkable economic journey and the need to address the persistent issue of inappropriate sovereign credit ratings.
Kant emphasized that these suboptimal credit ratings posed a critical hurdle to India's growth plans, impacting not only the country but also the entire Global South. "These misrepresented credit ratings are binding constraints for developing economies as they hinder the ability to attract necessary funds for growth, development, and even the fight against climate change," he stated.
Contrary to the assessments of prominent rating agencies like S&P, Fitch, and Moody's, which continue to place India at the lowest possible investment grades, Kant argued that the country's strong economic fundamentals are not objectively reflected in these ratings. "India's macroeconomic developments are not reflected in the many credit ratings by the Western agencies that use very opaque grounds for sovereign ratings," he said.
Notably, India has never defaulted on its debt obligations and boasts a robust foreign exchange reserve of $600 billion, along with an exceptional capacity to repay its external debts. Yet, the country's ratings have remained stagnant, despite its remarkable ascent from the 12th largest economy in 2008 to the fifth largest today, and its standing as the second-highest growth economy among its peers.
Kant highlighted the flaws in the methodologies employed by global credit rating agencies, which heavily rely on subjective indicators of governance and political stability, accounting for around 20% of the sovereign rating. "The aggregation of six governance indicators into a comprehensive measure of a country's governance is highly questionable and non-transparent," he said, emphasizing the need for greater accuracy and transparency in credit rating assessments.
Addressing this issue, Kant suggested the importance of homegrown credit agencies, such as CareEdge, which can provide a fair assessment of developing nations. "If private finance has to play a key role, then there was a need for homegrown credit agencies which are vital for fair assessment of developing nations," he said.
India's unwavering commitment to its economic growth and development is evident in the significant reforms undertaken in recent years to address the twin balance sheet problems. However, this progress is not adequately reflected in the country's sovereign credit ratings, which continue to act as a ceiling and restrict the flow of necessary funds, ultimately increasing borrowing costs and adversely impacting its bargaining power.
Kant's call for addressing the biases in sovereign credit ratings, mobilizing global financing, and promoting homegrown rating agencies underscores the urgency to create a more equitable world, where developing economies like India can truly thrive and fulfill their immense potential.
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