credit ratings

‘Egregious’ and ‘compromised’: Indian government feels ratings firms like S&P and Moody’s are biased

The backlash against India’s rating is getting louder.

Since September 2016, the Narendra Modi government has repeatedly voiced its disappointment with global credit ratings firms for not changing the world’s fastest growing economy’s sovereign rating. In fact, during this period the government has reportedly also lobbied with firms like Moody’s to get the country’s rating pushed up.

Now, the backlash is getting stronger.

On May 11, Arvind Subramanian, India’s chief economic advisor, once again alleged that ratings firms were biased towards other nations like China. “In recent years, rating agencies have maintained India’s BBB- rating, notwithstanding clear improvements in our economic fundamentals [such as inflation, growth, and current account performance]. At the same time, China’s rating has actually been upgraded to AA-, even though its fundamentals have deteriorated,” he said during a lecture in Bengaluru. Subramanian, a former economist at the International Monetary Fund, also said the ratings firms’ methodology is “one of the most egregious examples of compromised analysis”. In the past, too, Subramanian has criticised ratings firms for their methodology.

But is this scorcher justified?

While India is convinced that with its excellent gross domestic product growth and other economic fundamentals, the country deserves a ratings upgrade, firms think otherwise. Most of the top ratings firms like Standard and Poor’s, Moody’s and Fitch have underscored some glaring problems with the economy: India’s debt to gross domestic product ratio and the state of public finances.

This assessment doesn’t bode well with the Modi government, for whom a ratings upgrade was a top priority since coming into power three years ago.

Debt trap

Rating firms also say that an upgrade is unlikely in the near future.

On May 2, Fitch affirmed India’s BBB- ratings and said that “weak public finances continue to constrain India’s ratings”. In November, both S&P and Moody’s had affirmed their ratings on India and highlighted the country’s debt to gross domestic product ratio.

Currently, India’s debt to gross domestic product ratio – which shows how much a country owes to internal as well as external borrowers – is around 68%. India has brought down this ratio from over 80% in the early 2000s. In Asia, only Japan has a higher debt to gross domestic product ratio at 248%, according to International Monetary Fund data. China’s debt to gross domestic product ratio is around 43%.

“One issue that remains a constraint on the ratings is the fiscal balance. There is some fiscal consolidation at the central level but if you include the states as well, the general government deficit it is still very large compared with peers and the debt level is also very large, 68% of GDP,” Thomas Rookmaaker, director, sovereign ratings at Fitch told the Economic Times in on May 12.

“..It was mentioned in the budget speech [about] this targets of bringing government debt down to 60% of GDP but there is no clear commitments from the government and it is not clear yet what they are going to do with it,” he added.

Flawed analysis?

And it’s not only the government in India that is unhappy with the ratings firms. On May 1, Deepak Parekh, chairman of housing finance company HDFC Corp, questioned the lack of change in India’s sovereign ratings, despite it being the fastest-growing emerging economy with positive macroeconomic indicator. “On the other hand, Italy and Spain, which are far weaker and smaller, are having much higher ratings than us,” Parekh said.

The economic research unit of the State Bank of India, the country’s largest lender, said in a May 11 report that the ratings firms’ reasoning is flawed. The report said that many better-rated countries such as the United States, Singapore, Canada and Austria have a higher government debt-to-gross domestic product ratio than India. “In fact, most of these countries have debt positions which have been worsening over time but that has not affected their ratings much, maybe because of other macro fundamentals and the advantage of already being in the developed country bracket,” the report said.

The report added that the composition of the Indian government’s debt should also be looked at as India’s government debt is largely owed to domestic lenders. “As a conscious strategy, issuance of external debt [denominated in foreign currency] is kept very low in India,” the State Bank of India report said.

Other experts have noted that ratings firms sometimes don’t understand emerging economies. “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 less well-known,” Lourdes Casanova, a senior lecturer at Cornell University’s SC Johnson School of Management, told Quartz in January.

But with its relentless nagging, India seems out to ensure that ratings firms understand its economy better.

This article first appeared on Quartz.

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“My body instantly craves chai and samosa”

German expats talk about adapting to India, and the surprising similarities between the two cultures.

The cultural similarities between Germany and India are well known, especially with regards to the language. Linguists believe that Sanskrit and German share the same Indo-Germanic heritage of languages. A quick comparison indeed holds up theory - ratha in Sanskrit (chariot) is rad in German, aksha (axle) in Sanskrit is achse in German and so on. Germans have long held a fascination for Indology and Sanskrit. While Max Müller is still admired for his translation of ancient Indian scriptures, other German intellectuals such as Goethe, Herder and Schlegel were deeply influenced by Kalidasa. His poetry is said to have informed Goethe’s plays, and inspired Schlegel to eventually introduce formal Indology in Germany. Beyond the arts and academia, Indian influences even found their way into German fast food! Indians would recognise the famous German curry powder as a modification of the Indian masala mix. It’s most popular application is the currywurst - fried sausage covered in curried ketchup.

It is no wonder then that German travellers in India find a quite a lot in common between the two cultures, even today. Some, especially those who’ve settled here, even confess to Indian culture growing on them with time. Isabelle, like most travellers, first came to India to explore the country’s rich heritage. She returned the following year as an exchange student, and a couple of years later found herself working for an Indian consultancy firm. When asked what prompted her to stay on, Isabelle said, “I love the market dynamics here, working here is so much fun. Anywhere else would seem boring compared to India.” Having cofounded a company, she eventually realised her entrepreneurial dream here and now resides in Goa with her husband.

Isabelle says there are several aspects of life in India that remind her of home. “How we interact with our everyday life is similar in both Germany and India. Separate house slippers to wear at home, the celebration of food and festivals, the importance of friendship…” She feels Germany and India share the same spirit especially in terms of festivities. “We love food and we love celebrating food. There is an entire countdown to Christmas. Every day there is some dinner or get-together,” much like how Indians excitedly countdown to Navratri or Diwali. Franziska, who was born in India to German parents, adds that both the countries exhibit the same kind of passion for their favourite sport. “In India, they support cricket like anything while in Germany it would be football.”

Having lived in India for almost a decade, Isabelle has also noticed some broad similarities in the way children are brought up in the two countries. “We have a saying in South Germany ‘Schaffe Schaffe Hausle baue’ that loosely translates to ‘work, work, work and build a house’. I found that parents here have a similar outlook…to teach their children to work hard. They feel that they’ve fulfilled their duty only once the children have moved out or gotten married. Also, my mother never let me leave the house without a big breakfast. It’s the same here.” The importance given to the care of the family is one similarity that came up again and again in conversations with all German expats.

While most people wouldn’t draw parallels between German and Indian discipline (or lack thereof), Germans married to Indians have found a way to bridge the gap. Take for example, Ilka, who thinks that the famed differences of discipline between the two cultures actually works to her marital advantage. She sees the difference as Germans being highly planning-oriented; while Indians are more flexible in their approach. Ilka and her husband balance each other out in several ways. She says, like most Germans, she too tends to get stressed when her plans don’t work out, but her husband calms her down.

Consequently, Ilka feels India is “so full of life. The social life here is more happening; people smile at you, bond over food and are much more relaxed.” Isabelle, too, can attest to Indians’ friendliness. When asked about an Indian characteristic that makes her feel most at home, she quickly answers “humour.” “Whether it’s a taxi driver or someone I’m meeting professionally, I’ve learnt that it’s easy to lighten the mood here by just cracking a few jokes. Indians love to laugh,” she adds.

Indeed, these Germans-who-never-left as just diehard Indophiles are more Indian than you’d guess at first, having even developed some classic Indian skills with time. Ilka assures us that her husband can’t bargain as well as she does, and that she can even drape a saree on her own.

Isabelle, meanwhile, feels some amount of Indianness has seeped into her because “whenever its raining, my body instantly craves chai and samosa”.

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This article was produced by the Scroll marketing team on behalf of Lufthansa as part of their More Indian Than You Think initiative and not by the Scroll editorial team.