What is Sovereign Credit Rating?

KAKALI DAS

Sanjeev Sanyal, an economic advisor to Prime Minister Modi is also a part of Economic Advisory Council. But, after this year’s budget, when ‘journalist’ Anjana Om Kashyap asked question on tax exemption, he was irked by it.

It’s normal, nowadays, from Supreme leaders to the ones in the basement, to avoid questions openly.

But Nirmala Sitharaman, according to the leaders of BJP, have presented a successful budget that will make us the world leader, haven’t she?

Then, why was Sanjeev Sanyal stressed when the question was posed?

Those officers who actually work, and not merely give speeches, have acknowledged that political atmosphere may be worsening our image.

“A sovereign credit rating is an independent assessment of the creditworthiness of a country. It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk. Factors like economic risk, whether the country can return debt.”

Sadly, they can only speak about it indirectly.

In 2020, when pandemic was on its way, Ministry of Finance was grappling with another problem.

That how to deal with negative commentary from international community.

On one hand, our news anchors told the public that we became the world leaders. And on the other hand, global think tanks, “biased” international media wrote negative stuff about us! (sarcasm intended) Sanjeev Sanyal feared if this continued then our sovereign rating could worsen, to junk.

What is Sovereign Credit Rating?

A sovereign credit rating is an independent assessment of the creditworthiness of a country. It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk. Factors like economic risk, whether the country can return debt. Apart from these, 18-26% of rating is subjective, depending on governance, political stability, rule of law, press freedom, corruption etc.

AAA rating indicates full investor confidence, and below BBB rating is considered bad.

Importance

• Access funds easily from international bond market. When country wants to access funds, then this rating is useful.
• Attracts Foreign Direct investment.

Roughly speaking, it is like a credit score, for a nation. The top sovereign rating agencies in the world include Standard and Poor’s, Moody’s and Fitch ratings.

In June 2020, Moody’s gave us BAA3 rating with a negative outlook. It is the lowest medium grade, and below this rating, it is a non-investment speculative grade. This rating was like a passing mark figure. Moody’s downgraded the rating citing our governance. It said that the government’s focus is not on economy. Moody’s outlook was pessimistic.

Also in June 2020, Fitch ratings gave BBB – which means high uncertainty on investments, citing repeal of Kashmir status, CAA protest, changes to the status of illegal immigrants based on their religion etc.

And by observing a stronger focus by the ruling Bharatiya Janata Party on its Hindu-nationalist agenda since the government’s re-election in May 2019, they wrote on their report that the government’s focus on economic reform implementation is decreasing. In 2020, they wrote about social tension, as we see pictures of today.

From a business perspective, we can guess if this atmosphere is positive or negative. At that time, when Sanjeev Sanyal was principal economic advisor, he circulated a presentation internally named – Subjective Factors that impact India’s Sovereign Ratings: What can we do about it? This internal presentation has reached hands of India Express journalist.

Sanyal told in his presentation that sovereign rating agencies are influenced by World Bank’s World Governance Indicators (WGI). We are all familiar with World Bank, that is delivering bad news when it comes to our sovereign rating, aren’t we? (sarcasm intended)

Sanyal believed that this was so because of inputs by Western press, surveys by NGOs, etc. Especially the bunch from JNU. Sanyal also wrote in his presentation indicating that our sovereign rating could downgrade to junk category.

How to rectify this downfall?

By not mistreating students and protesters, or law and order improvement!The government needs to think of ways to reach out to these agencies, initiate continuous discussions, sensitize them on our internal matters.

It is not clear if the government did indeed take those steps, but in October 2021, Moody’s upgraded India’s rating to ‘stable’ from ‘negative’. The time for new rating is nearer. The rating comes in 2 year gaps, and in last 2 years, on many indices our ranking has fallen, which may reflect in sovereign rating – labels like ‘partly free’ from ‘free’ in democracy, and electoral autocracy. In the latest Press Freedom Ranking, we are competing with Sudan.

So, these rankings are not needless, they matter. India Express report shows that government knows the importance of these ratings. We have managed to come this far on the basis of perception. But economy is crippling, as demographic dividend is under-utilized. Ministry of Commerce and Industry stated that FDI inflow declined by 15% in 2021. In 2021, it was assumed that hundreds of companies leaving China would set up industries in India.

But it didn’t. If our upcoming sovereign rating is bad, FDI will lessen more. Debt to GDP ratio was 48.8% in the 1980s, and now it is 89.6% in 2021.

Sanjeev Sanyal made a point to reach out to these agencies – surveyor, journalists, NGOs, academicians who make these reports, write about the country – that we will become No. 1 by 2047.

The second way to better sovereign rating includes acknowledging mistakes because of which our ranking in indices falls. We don’t want us mocked because of a ranking. And one or two ratings could be manipulated, but not twenty. It is hard to manage agencies. So work will talk more. Bulldozer will have to be used for construction, and not destruction. Steps ensuring progress needs to be taken.

Remember, if Reliance is making millions amid ongoing war in Ukraine, in terms of oil imports, our nation can too. Ukraine and Sri Lanka are major agriculture exporters. Many African countries import grains from Ukraine. Sri Lanka, as well, exports 300 million kg tea from them. Now, this is an opportunity for us to reach new markets. But it can only happen when focus is right on economy.

Otherwise, we can always cry and blame Nehru or Manmohan Singh or international conspiracy for these mess. Ratings do reveal some truth and so we must acknowledge what and where we lack and mend our ways.

[ Headline image: Business Standard]

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