Why Bank Of Baroda's Madan Sabnavis Says India Deserves Higher Credit Rating
The Indian economy today is different from what it was historically when this rating was accorded, he said.
In case of rating sovereigns, it is important to look at the complete picture, and not focus on some aspects like rating agencies seem to, according to Madan Sabnavis, chief economist at Bank of Baroda Ltd.
It is accepted that India is one of the best performing economies in terms of economic growth, said Sabnavis. While retail inflation too has been capped, even at 6% (the upper bound of the monetary policy committee's target range of 4+/-2%), it is reasonable for a developing economy, he said.
External indicators such as the balance of payments have been strengthening over time, he said, citing how foreign exchange reserves came within an earshot of exceeding $600 billion, which is adequate to cover imports for around 8-9 months.
The final test of the investment worthiness of a country is what foreign investors feel about it, according to Sabnavis. India has been gaining credibility as an investment destination with foreign direct investments and foreign portfolio investors, he said.
Considering India's strong macroeconomic fundamentals, ratings that are just investment grade are not quite justified.
The Indian economy today is different from what it was historically, when this rating was accorded, and sticking to the current ratings is not very convincing.Madan Sabnavis, Chief Economist, Bank of Baroda.
While global ratings agencies have acknowledged India's strong GDP growth and external finances, these are offset by the country's weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, such as GDP per capita. As such, ratings agencies continue to reaffirm India's ratings.
While Moody’s rates India Baa3 negative, Fitch and S&P Ratings have reaffirmed India's ratings at BBB-. All are the lowest investment grade ratings.
If there is money being lent to a country, is the country in a position to service the debt? This holds for corporates as well as countries. The scenario differs in case of countries, as a country can print money in the worst case scenario, Sabnavis explained. This becomes important in case of India, as we don't have government debt that is denominated in dollars. So, in case of debt servicing challenges, at worst, India can print currency, he said.
On ratings agency concerns around public debt, Sabnavis said it's a stock concept and will keep increasing. What should be seen is if the government is doing something about fiscal deficit and the pace of fiscal consolidation. The government was mindful of expenditure even amidst the pandemic, with it's guarded response helping boost recovery, he said.
In countries like India, which has a large amount of people in the low-income groups, there is a lot of support that has to be provided by governments of emerging markets. Therefore, to use the same criteria used for the developed economies is not fair, Sabnavis said.
Sabnavis questioned what was so sacrosanct about having a fiscal deficit target of 6%? It was a norm imposed by India itself to bring fiscal discipline, he said.
The fiscal deficit target has to be an evolving number. It has to be ensured that the country does not suffer in the quest to bring down fiscal deficit to 3%, Sabnavis said.
The point to be made is that rating agencies need to have a different approach when rating emerging markets versus developed markets, he said.
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