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QZ&A

Modi’s India seeking a ratings upgrade from Moody’s is neither undesirable nor a new practice

By Madhura Karnik

Rating agencies play a major role in determining the macroeconomic indicators of a country. This is especially true in emerging markets such as India.

So, when on Dec. 25, Reuters reported that India has “aggressively pushed” for a ratings upgrades with Moody’s, the financial wire divided India’s policy-makers and columnists into distinct camps.

While some felt that Narendra Modi’s government is justified in questioning the rating agency’s methodology, others thought that prime minister Modi was making a “tragic mockery” of Asia’s third-largest economy.

In November 2016, Moody’s had re-affirmed India’s sovereign rating—Baa3, the lowest in the investment grade—and indicated that an upgrade was “unlikely” in the near-term because of the country’s debt burden. India, on the other hand, felt that the continuous decline in its debt burden over the last few years was being ignored.

“Given that countries are on different stages of economic and social development, should countries be benchmarked against a median or mean number (as is done by Moody’s)?” a finance ministry email to Moody’s, viewed by Reuters, asked. Indian officials have complained that Japan and Portugal enjoy better ratings despite being saddled with debts twice the size of their economies.

In India’s case, “while the debt burden lowered significantly post 2004, this did not get reflected in the ratings,” the ministry said.

A ratings upgrade has been a top priority on Modi’s agenda since he came to power in May 2014.

Lourdes Casanova, a senior lecturer at Cornell University’s S C Johnson School of Management, believes it is perfectly acceptable for India to expect more from rating agencies.

Casanova, an expert on emerging market economics, said replying to an email questionnaire from Quartz that developing countries are often given the short shrift by rating agencies, which makes it necessary for their governments to communicate more aggressively with the firms.

Edited excerpts:

Q: There are reports that India lobbied with Moody’s for higher ratings. It has sparked a debate in India and experts are divided. What do you feel about it?

LC: There are two types of countries: those with investment grade, they don’t worry about ratings; those without investment grade, such as India. The rating given by the agencies determines the interest rate of the government debt. High interest rates help increase the debt in a very rapid way. While the US and Europe are financing themselves at very low interest rates, India has to issue government bonds at around 7.5%, which makes financing much more expensive.

At a moment when India’s economy is growing at very high rates, the country expects agencies to improve its ratings. Rating agencies move at a slow pace and it is understandable that India wants to have its voice heard.

Q: Do other emerging markets also lobby like India?

LC: Emerging markets suffering from low ratings try to establish communication channels with rating agencies, which is vital for their capacity of financing at cheaper rates.

Screenshot/Cornell University
Lourdes Casanova

Q: Have rating agencies been unfair towards emerging markets like India?

LC: Emerging markets feel that rating agencies don’t understand them, and don’t know them well.

Q: What are some of the issues that emerging markets have with rating agencies?

LC: Rating agencies classified as AAA some of the most obscure financial products such as subprime mortgages, which were at the heart of the global financial crisis of 2007-2008. The big three rating agencies which control 95% of the market, the American Moody’s and Standard and Poor’s (S&P), and the British Fitch, tend to have a better knowledge of countries and products closer home, while those far away geographically are lesser well-known. Hence, the frustration of emerging markets which are so dependent on ratings and feel misunderstood.

The ratings are also quite opaque, with investment grades at different levels by different agencies. The whole system is not easy to understand beyond the top of the line, the AAA. What does Baa3+ even mean?

Q: How are sovereign ratings different from corporate ratings?

LC: Corporate rankings affect the shareholders of that particular company and, to a certain extent, their employees. The ratings of governments have tremendous consequences for all the citizens of that country. In the case of India, 1.2 billion people. Rating agencies have an overwhelming power over the interest rates those citizens can borrow at to buy a house, a car or a pair of shoes.

Q: Is it common in the West to lobby for a sovereign upgrade? 

LC: When S&P downgraded the US debt, the president of S&P resigned.