Moody’s announced an upgraded ranking for India recently and since then, the country has been talking business. Of late, there have been a number of discussion concerning a lot of factors around the economic development in the country as well as the future of country’s economy.
Though a number of people are still unaware of the factors considered by these credit agencies to decide their rankings, they have been vocal to raise their voice in support or opposition to the ranking upgrade by Moody’s.
After Moody’s, another prominent rating agency, Standard & Poors (S&P) is set to declare its new rankings today. The Indian diaspora is hoping that the country gets an upgrade in this year’s rating, because the agency has not upgraded India’s rating since 2007. India has been given BBB- rating, considered as stable in 2007 by S&P. Moody’s recently upgraded the status of India’s rating to positive with Baa3 and since then, the economic superheads are hopeful of seeing an upgrade from S&P as well.
However, to understand these ratings and their significance to India, one must have an idea about how these ratings are decided by these rating agencies. There are a number of factors, which are considered and every single factor is given a score. The combined score then results in the decision of a rating point.
According to the data released by IMF in March this year, the major factors considered by the rating agencies include National GDP, GDP Per Capita, Projected real GDP Growth, Inflation, FDI compared to the GDP, debt compared to GDP, debt of non financial sector compared to GDP, Ease of Doing Business, Quality of Infrastructure and Corruption Index.
National GDP & GDP Per Capita
Indian GDP currently stands at the sixth position globally with a value of $2.26 Trillion in 2016-17. This is an increase of over 36 percent since 2010-11. The general government deficit has also come down to 6.7% in 2016-17 from the peak of 8.3 percent it touched in 2011-12.
Talking of the current account deficit, India has seen a significant improvement. Currently, the deficit stands at 1.4% (according to 2016-17). In 2012-13, it touched seven-year peak at 7.8%. India also boasts of considerable forex reserves. India can withstand 4.7 months of current average account payments. In the forex reserves, the country currently ranks among the top 10 countries in the world. The ratios of household debt to GDP as well as of non-financial sector have been moderate for the last couple of years.
The current government has been showing its progressive approach to establish India among the top countries of the world with a number of initiatives for both, the businesses and investors. It has laid out simpler rules for FDI and implemented a number of changes to rise up in the rankings for ease of doing business. To tackle the wilful defaulters, the government has also made changes to its bankruptcy code. Also, a simpler taxation system after the implementation of GST is expected to make things even easier for businesses. This will also make the businesses and investments more transparent and improve government revenues in the coming days.
Other invisible factors
The factor, used by these credit agencies to decide the rankings include forming categorical groups of the countries of similar GDP, growth, per capita income etc. The ratings are then decided considering the bigger factors, including economic strength, fiscal performance, growth rate, institutional growth, and scope etc.
One of the reasons behind India receiving a continuous low rating by these agencies is the fact that the country has a low per capita income. These agencies have grouped India with other countries of the same per capita income level. The countries with higher per capita income are considered stronger because they have a tendency to withstand cyclical volatility and are prone to address higher debt levels. The fact that India lies in the group of other countries with low per capita income group, its ratings have been consistently lower than the countries with higher deficits and low growth prospects like that of the developed countries.
If we dig into details of whether the lower per capita income of India can cause political instability, the answer comes out to be a big No. According to Gini Index, a rating given on a scale of 1 to 100, which measures country’s income distribution with 0 showing perfect equality and 100 showing perfect inequality, India has got 33.5 and it is on par with the countries including China (46.9), Spain (35.9) etc.