Sovereign credit ratings play a vital role in evaluating a country's creditworthiness, yet concerns persist regarding the credibility of the current dominant agencies—S&P Global Ratings, Moody's, and the Fitch Group. Despite their significant market share, these agencies have faced criticism for past failures, particularly during the 2007–2008 global financial crisis, and for occasionally misjudging economic collapses of a few nations despite the high ratings given to them.
While the involvement of external agencies in reviewing a country's economy promotes transparency, it also prompts questions about the objectivity and reliability of their assessments. Key factors such as GDP growth, per capita income, inflation management, external debt management, economic development, and history of defaults are integral to sovereign credit ratings. Nevertheless, the dominance of a select few agencies in this process can compromise the diversity and independence necessary for accurate evaluations.
It's undeniable that high credit ratings facilitate easier access to funds from the international bond market and attract foreign direct investment, crucial for a country's economic growth. These ratings significantly influence how foreign investors perceive a nation's creditworthiness, impacting the cost of borrowing overseas capital. This ripple effect extends to Indian businesses seeking international finance, often closely tied to the nation's overall rating. In light of this, India has consistently advocated for transparency and reform in the parameters utilised by global credit rating agencies, emphasising the need for assessments to reflect the countries’ true capacities and willingness to meet debt obligations.
Even though India's rating has remained stagnant due to entrenched perspectives, it's striking to observe that heavy-debt laden nations like the United States benefit from notably lower interest rates on their debt, underscoring disparities in the evaluation process. Achieving objectivity requires rating agencies to embrace a realistic and transparent framework, particularly when evaluating developing countries and emerging markets. This involves delineating objective metrics from subjective analyses, like simulations and stress tests, to ensure a fair and precise assessment universally.
All three global rating agencies have assigned India the lowest investment grade rating. Fitch, for instance, affirmed India's sovereign rating at ''BBB-'' with a stable outlook, citing robust growth and resilient external finances. However, they maintain that India’s stronger fundamentals are overshadowed by the government's weak fiscal performance, burdensome debt stock, and the economy's low GDP per capita. Interestingly, despite a higher debt load and debt-to-GDP ratio, the US enjoys a higher sovereign rating.
For fifteen years, India's sovereign rating has remained unchanged, despite a global-best economic growth rate. When India had sluggish policy reforms, corruption scandals, and the twin balance sheet problem, it deterred foreign investors, leading the big three credit rating agencies to downgrade India to the lowest investment grade. However, since then, over the past decade, India has emerged as the world’s fifth-largest and fastest-growing economy. India is an attractive market for foreign investors, as shown by the inward investments, and a robust capital markets. Despite this progress, global loan and bond markets continue to assess India's risk as lower than the assigned ratings suggest. Furthermore, certain Western economies with a history of defaults have received higher ratings than India. This highlights a disparity in the evaluation process.
Quantitative analysis indicates that more than half of credit ratings are shaped by qualitative factors. About 20 per cent weightage of sovereign ratings hinge on subjective indicators such as governance and political stability. However, these metrics, often determined by a limited group of experts, lack transparency and may not effectively capture a sovereign's commitment to fulfilling obligations. This overemphasis on subjective measures presents challenges for developing economies like India, to fight the western bias.
Despite having more foreign exchange reserves than net foreign exchange debt, India's sovereign credit rating remains slightly above speculative grade. India's performance in meeting global obligations has been judged as insufficient, and interactions with global rating agencies have not led to the desired enhancements.
In contrast, China has taken a divergent path, with its own rating agencies expanding internationally since 2012. It's time for an independent rating agency, free from historical biases, to re-evaluate the sovereign rating process. Although this idea has been discussed at BRICS Summits, tangible progress has been limited. Existing alternatives, such as ARC Ratings and various regional agencies, have made little impact. Given India's growing global importance, now presents an ideal moment for a domestic credit rating agency to enter this arena. This initiative will demand dedication and resources, with a focus on key parameters such as economic structure, fiscal strength, external linkages, and governance quality. The approach should be data-centric, reducing subjectivity and prioritising actual risk assessment over perceived risk.
The establishment of an independent and unbiased sovereign credit rating agency will offer numerous benefits to the Global South. Firstly, it will provide these nations with fair and accurate assessments of their creditworthiness, enabling them to access international capital markets on more equitable terms. By reducing reliance on ratings from dominant agencies, which may carry biases or overlook the unique strengths of these economies, countries in the Global South can attract more foreign investment and secure financing at lower costs for development projects. Overall, a fair and unbiased sovereign credit rating agency tailored to the needs of the Global South will contribute to greater financial inclusion, economic stability, and prosperity for these nations, ultimately helping to bridge the gap between developed and developing economies.
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