Rating agencies have lost the plot on India’s growth story

Chief Economic Advisor Arvind Subramanian’s pun on the ‘poor standards’ of rating agencies, including Standard & Poor’s, is spot on. Memory is a slippery thing, and more so for rating agencies who have conveniently forgotten their complicity in the unmitigated disaster that was the Great Recession of 2008.

Then, global rating agencies certified toxic mortgage-backed securities as AAA, the highest possible rating. These complex financial products were then sold off by financial investment firms and banks, who went on to make a killing, till the time the US housing market went belly-up. The ripples of this bust were felt in large swathes of the global economy, almost sinking the European, Latin American, and South East Asian business infrastructure.

But memories of almost a decade back have been filed away, along with questions about the reliability of these rating agencies. Credit rating — be it of a bank, of a financial or a non-financial firm or a company — is an assessment of the capability of the entity to service its debt obligations. These ratings scrutinise a host of factors and risk elements that could possibly derail the debt payment and lead to a default. When an assessment of this sort is carried out for a nation, it is known as a sovereign credit rating. Agencies like Moody’s and Standard and Poor’s play a much bigger role than they can shoulder as it is these ratings given by them that determine if an emerging or a developing country will have access to capital from the international markets. An upgrade in the ratings reduces the interest burden on these countries, while a downgrade makes funds costlier.

These agencies’ ratings for India have remained at BBB- since 2014, despite the rise in GDP growth and the fact that India, in the entirety of its independent history, has not defaulted on a loan. While India’s growth rate continues to be north of 7%, China has slipped from 10% in 2008 to 6.5% now, without any impact on its ratings, which has been maintained at AA- since 2010.