- Wealth PMS (50L+)
Reader Ramaiah comments:
India debt rating is BBB- which is equivalent of Iceland. Iceland is broken during the credit collapse. Is India that bad? Does it mean, it is safe to keep money in Dollars rather than converting into INR. What can we infer from this rating?
This is why Rating Agencies are malicious, illiterate and plainly stupid. Iceland was on the verge of default – India is nowhere close.
We have very little external government debt – foreigners hold little or no percentage of our government paper – and in fact are net lenders to the IMF. (Latest figures: We have $1.4 billion lent to the IMF) Iceland on the other hand had to pay a LOT of money outside its shores. And that applies to a lot of countries that borrow in currencies like the dollar instead of their own local currencies; India borrows largely in rupees, which, in the case of an extreme crisis, it can print to pay back debt.
(You think that’s bad? The US is doing it. And they’re rated AAA)
Let’s also look at total government debt. India’s total public debt, if you include internal, external and other liabilities, is 30 lakh crore, which is about 60% of our GDP. The US, rated AAA, has its government debt at $12.35 trillion, on a GDP of $14 trillion – 86% of GDP. Most “highly rated” countries have debt in excess of 100% of GDP.
Fitch, which recently "retained India at BBB-", said there was a huge problem in the fiscal deficit which was 11.6% of GDP. Unfortunately for them, their top AAA rated sovereign, the US, announced that it’s deficit would be a staggering $1.56 trillion. That is about 11% of GDP, for the benefit of Fitch, which seems to have misplaced it’s calculators when it comes to doing appropriate calculations for western countries.
Additionally, India is growing at 7% on GDP. Okay, so we manipulate a bit of that but we are largely positive. The U.S. on the other hand, thinks 1% is great growth. Most western countries would give their left hand for 7% GDP growth. But they don’t have to, because they’ll get rated AAA anyway, it seems.
And this is just the initial layers. Peel away more, and you will find more inconsistencies, stupidities, malice, ignorance and bias of the rating agencies. The rating agencies are, and should be, irrelevant. Not just because they don’t seem to be able to rate properly, but also because relying on their rating has resulted in huge losses; their “AAA” rated instruments have defaulted and their “BBB-“ rated instruments have performed very well. It’s better, therefore, to ignore them and remove any rating barriers to investing; luckily in India we have very little or no rating barriers (correct me if I’m wrong), but in the US there is still a lot of rating restriction, like certain kinds of funds can’t invest in assets rated less than AAA and so on.
But that doesn’t mean we’re not in trouble. Even if you ignore the rating agencies, our deficit is a serious problem on it’s own. We have to issue 400K crore – Rs. 4 trillion – of government paper next year, though my bet is that it will easily be bought and fresh issuances is probably less than half that (the rest is revolving debt as it expires) We have to fix the fact that our subsidies and exporter benefits are stealing from us, the taxpayers, in the form of larger deficits. But rating is a comparative game, and in that game, we’re better off than most other countries, and can even rely on a well established parallel “black” economy in case of a really serious crisis. The rating agencies don’t have a clue, and wouldn’t even if you dangled it in front of their face; of greater concern is that we bother about them in spite of their obvious flaws.
Case in Point: Greece was set at BBB+ (two grades above India) in Dec 2009. Greece is on the verge of default. Enough said.