Why India has a POOR CREDIT RATING Despite being the fastest growing ECONOMY? : Detailed CaseStudy

Summary

The video discusses India's impressive economic growth over the past decade, despite global challenges such as the COVID-19 pandemic and geopolitical conflicts. However, India faces an unfair disadvantage in global credit ratings, which negatively impact its borrowing costs. The video explains how credit rating agencies like Moody’s, Fitch, and S&P determine a country’s rating, and how India, despite its strong economic performance, is rated poorly compared to smaller economies. The Indian government is pushing for reforms in these ratings to better reflect India's true economic potential, avoiding the unnecessary extra costs on loans.

Takeaways

• 📈 India's economy has shown extraordinary growth over the past 10 years despite global challenges like COVID-19, the Russia-Ukraine war, and the Israel-Palestine conflict.
• 🚀 Analysts expect India to remain the world's fastest-growing major economy this year, with high potential for continued growth.
• 💳 India's low credit rating (B2, second-lowest investment grade) is seen as unfair, especially compared to smaller economies like Peru, the Philippines, and Kazakhstan, which have better ratings.
• 📉 Due to this poor credit rating, India is forced to pay significantly higher interest rates on its debt, costing the economy thousands of crores annually.
• 💡 Credit ratings directly affect the interest rates on sovereign bonds, meaning that lower ratings increase borrowing costs for India compared to higher-rated countries like the Philippines.
• 📊 India’s Ministry of Finance has published research challenging the methodologies used by credit rating agencies, claiming that India's strong economic fundamentals are being overlooked.
• 🇮🇳 Despite being the fifth-largest economy and never defaulting on its debt, India has one of the lowest investment-grade credit ratings, creating an unfair disadvantage.
• 🔍 The Finance Ministry's research paper highlights discrepancies in how India is rated compared to its actual economic performance, such as GDP growth, inflation, and external debt.
• ❓ Much of the ratings process is based on subjective judgments and qualitative factors, making it difficult for India to argue its case on quantitative grounds alone.
• 🔧 India is calling for a change in how credit rating agencies evaluate its economy, pushing for a more accurate reflection of its economic strength and growth potential.

Q & A

What has contributed to India's extraordinary economic growth over the past decade despite global challenges?

India's extraordinary economic growth over the past decade has been driven by various factors, including strong domestic demand, economic reforms, and increased foreign investment. This growth has continued despite global challenges such as the COVID-19 pandemic, the Russia-Ukraine war, and the Israel-Palestine conflict.

Why is India's credit rating still low despite being one of the fastest-growing economies?

India's credit rating remains low due to outdated or biased evaluation methods by international credit rating agencies like Moody's, S&P, and Fitch. These agencies often rely on subjective qualitative assessments, which do not accurately reflect India's economic strength and growth potential.

How does a country's credit rating affect its ability to borrow money through sovereign bonds?

A country's credit rating influences the interest rates it must offer on sovereign bonds. A lower credit rating leads to higher perceived risk, causing investors to demand higher yields. This increases the cost of borrowing for the country, as it has to offer higher interest rates to attract investors.

What is the significance of India's debt-to-GDP ratio, and how does it compare to other developed nations?

India's debt-to-GDP ratio stands at 81%, which is relatively low compared to developed countries like the United States, Japan, and China, whose debt levels exceed 100% of GDP. Despite this, India's credit rating is significantly lower, highlighting a disconnect between its actual fiscal health and how it's perceived by rating agencies.

How do credit rating downgrades impact the cost of new bond issuances for India?

When India's credit rating is downgraded, the yield on existing bonds rises, making it more expensive for the government to issue new bonds. Investors demand higher interest rates on new bonds to match the increased yield of older bonds, resulting in higher borrowing costs for India.

Why is India’s credit rating lower than smaller economies like the Philippines and Peru?

India’s credit rating is lower than smaller economies like the Philippines and Peru due to the subjective nature of credit ratings and the use of outdated models that do not fully account for India's economic size, growth rate, and ability to repay debt. This discrepancy leads to higher borrowing costs for India despite its superior economic fundamentals.

What role do subjective parameters play in credit rating evaluations, and how does this affect India?

Subjective parameters, such as expert perceptions and qualitative assessments, play a significant role in credit rating evaluations. In India's case, 13 out of 18 parameters used by agencies like Moody’s are qualitative, which leads to ratings based more on perception than actual economic data, contributing to India's unfairly low rating.

What are sovereign bonds, and how do they function in raising funds for government projects?

Sovereign bonds are debt securities issued by a government to raise funds for public projects. Investors purchase these bonds, and in return, the government pays periodic interest and repays the principal amount at the bond's maturity. These bonds can also be traded in the secondary market.

How has India historically performed in terms of credit default risk?

India has never defaulted on its debt, making its low credit rating puzzling given its strong track record of meeting financial obligations. This historical performance contrasts with its low credit rating, further fueling concerns about the fairness of international rating agencies' assessments.

What steps has the Indian government taken to address the issue of unfair credit ratings?

The Indian government has raised concerns about unfair credit ratings through research papers and reports, highlighting the discrepancy between India's strong economic fundamentals and its low credit rating. The government has called for a reevaluation of the criteria used by international credit rating agencies to more accurately reflect India's economic performance.