Credit Rating is a forward-looking opinion about credit risk involved in securities. Sovereign credit rating tells about the investing environment of the whole country. These ratings are provided by the organizations such as S&P, Fitch and are called credit rating agencies. Different agencies have different parameters to rate a Sovereign on its creditworthiness. Usually ratings are expressed in a range from AAA the highest to D the default status. Indias rating has been recently cut to negative outlook as BBB-/ negative from BBB-/stable with BBB-rating being the lowest in the investment grade by Fitch and S&P. While S&P have reported the cut on account of Slowing GDP Growth and political roadblocks to economic policy making, Fitch have cut the rating over significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio.
Above agencies have further claimed that division of roles between Congress President and Prime Minister, structural changes surrounding the investment climate in the form of corruption and inadequate economic reforms and the policy paralysis has led to the negative opinion in the investment rating. In response the Government has dismissed the outlook stating the downgrade is based on old data and recent developments in countrys economy are not taken in to account.
Is this credit rating really justified?
Lets examine this based on parameters of the rating done. Various factors such as political, economic, liquidity scenario, fiscal stability are taken into account while evaluating rating on a scale. Political stability, roadblocks in implementing reforms, functioning of the institutions, resilience to Global factors, debt payment culture, economic structure and growth aspects and how all of these effect the countrys investment scenario represent the major political and economic factors. Status of countrys currency globally, sovereign debt and fiscal deficit are other factors important in determining the rating for any country depending on the level of effect they have on the investments done.
Indian credit rating history has been floating in the no investment grade to low investment for past 25 years. Post the BoP crises of 1991 when India was downgraded by S&P to below investment grade it was in 2007 when all 3 major global rating agencies S&P, Moodys & Fitch placed India in the investment grade owing to strong economic aspects but in hope of improving fiscal position, decline in government debt and deficit. Factors have contributed in rising economic issues of India as:
Rupee has drastically depreciated owing to pullout of Foreign Institutional Investors from the Stock Markets
This year fiscal deficit was to be 4.6% of the GDP but Government announced in Mar12 that deficit has increased to 5.9% of the GDP owing to lower tax and dis- investment income, higher subsidies and other expenditure.
Policy Paralysis has become a new catchphrase in Indian Context. FDI in various sectors, GST, Deregulation on petroleum products, Formulation of strong Lokpal etc. have been reforms, which are long due pending.
Many corruption cases have been reported these years, which further raise questions in the efforts put towards driving the growth of the country. CWG scam, Coalgate scandal, 2G scam, Mining scams have seriously jeopardized Indias image globally.
Indias GDP growth slowed to 5.3% in Jan- Mar12 and is expected to be around 6.5% for 2012-13.
Rising Current Account Deficit due to rising imports than exports also adds to the
problems.
Moreover this is the time for the leaders of the country to make India stand out when most of the developed nations of the world are facing major economic scenarios.