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Do ratings agencies have a bias against India?

LiveMint logoLiveMint 21-06-2017 Ragini Bhuyan

Do global ratings agencies such as Standard and Poor’s or Moody’s have a bias against Asia’s third largest economy? If you ask Indian policymakers or politicians, they are likely to say yes. Weeks after the chief economic adviser to the finance ministry, Arvind Subramanian, lashed out against the low ratings assigned to India by these agencies, Prime Minister Narendra Modi along with his Russian counterpart Vladimir Putin vowed to develop a credit rating industry that is “independent from political conjecture” during Modi’s visit to Russia.

But does the ratings data suggest an anti-India bias? A Mint analysis of ratings data suggests that while there may not be any India-specific bias, there seems to be a bias more broadly against emerging market economies.

As the chart below shows, there is absolutely no link between the sovereign rating assigned to a country and the country’s debt-to-GDP ratio.


Developed markets are rated higher than emerging markets, irrespective of their debt levels.

This is not a new problem though. In her landmark study on ratings agencies in 2002, Harvard University economist Carmen Reinhart showed that emerging markets tended to receive differential treatment from ratings agencies, after examining data for over 40 economies, covering ratings issued over 1979-99. Reinhart found that following a currency or banking crisis, rating agencies were much more likely to downgrade an emerging economy, and do so with greater severity. In the case of Moody’s, the difference between probability of a downgrade in an advanced economy versus that in an emerging economy was as high as 10 percentage points.

Research by Reinhart and other economists has also drawn attention to the poor record of ratings agencies in predicting currency or banking crises.

Six months before Greece’s 2010 bailout, Moody’s had issued a note stating that short-term liquidity was not a concern. As the chart below shows, developed markets were rated investment grade just three years before they defaulted.


Credit Default Swap (CDS) spreads, which indicate market perception of default risk, are also often at odds with the ratings assigned by the global ratings agencies. The divergence seems to have widened after the global financial crash of 2008, according to research by Yang Liu and Bruce Morley of Bath University, UK. Their research suggests that CDS spreads may be driven more by macroeconomic fundamentals than credit ratings.

While India continues to be rated ‘BBB-’—just a notch above the junk grade and lowest among investment grade ratings—by most of the global credit rating agencies despite the government pitching hard for an upgrade, it is not alone in facing such poor ratings despite relatively stable macroeconomic parameters.

Despite a relatively lower debt-to-GDP ratio, countries such as Russia, Turkey, Nigeria, and Indonesia are rated worse than India and China, which have much higher government debt. The data suggests that neither the extent of public debt nor external account vulnerability has any strong link with ratings. The one variable that does seem to have a strong correlation with ratings is the fiscal deficit, or the net addition to public debt. Emerging markets with lower fiscal deficit tend to have better ratings.


The one outlier among emerging market economies, which has a relatively high rating is China. It is rated A1 by Moody’s. The answer to this perhaps lies in China’s size and its integration with the global economy in general, and the US economy in particular.

As a 2013 paper by Andrea Fuchs and Kai Gehring of the University of Heidelberg showed, ratings agencies tend to favourably rate their home countries as well as countries that share strong economic ties with the home country. This may explain why China, the US’s largest trading partner, is rated much better than other emerging market countries by US-based ratings agencies.

The Modi-Putin sabre-rattling against the US-based ratings agencies may be justified but the payoffs are uncertain. It would be better for these leaders to focus instead on getting the basics right: keep fiscal deficits in check, and grow their economies fast. As our analysis shows, low fiscal deficits enhances the chances of a ratings upgrade. And as China’s example shows, size plays a key role in determining global influence.

Tadit Kundu contributed to this analysis

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