CREDIT RATINGS

Since 2000, credit ratings for India, China and Indonesia (INO) have improved. Whilst India credit rating has hardly moved, China and Indonesia CRs have risen sharply.  In the last few years when India has gained at so many levels, it is hard to reconcile the lack of CR movement. A sharp appreciation ought to happen based on the following: 

1. Growth:            India    >  China  >>  Indonesia (2016)
2. Fiscal deficit:   Indonesia    >  India   >  China  (2016)
3. Debt% GDP:    Indonesia   >  China  >>  India  (2015)

Growth: India has been rising strongly and is now ahead of China. China has fallen in successive years whilst INO was stable. China dollar GDP growth had been sky-high but it has fallen sharply. India has risen and is now ahead of China. INO dollar GDP growth has turned negative for the last two years. 

Indian Rupee has appreciated against other currencies over 3-5 years; and this is in spite of having had higher inflation. It suggests Indian currency is getting strong traction among investors.

GDP%       2012-15 (16Q)    2016 
India           6.54%               7.37%     rising
China          7.46%               6.73%    falling
INO             5.37%               5.02%     stable     
(see link 1)

$ GDP%   2011 - 2014      2014-2015 
China          14.5%               7.0%    falling
India            5.4%                6.0%    rising
INO              4.2%               -2.8%    falling   

Fiscal deficit: India has improved each year and is ahead of China. It is expected to improve further. China & INO have slipped from low levels.

            2011 -2015        2015-2016     2016 
INO            1.7%               2.3%               2.2%   stable       
India           4.8%              3.7%               3.5%   falling
China         1.8%               3.1%               3.8%   rising
(see link 2)

Govt debt: lndia lags behind INO and China (see notes below). Debt has been stable over 4yrs, though has fallen since 2008 from 74 to 69%. INO debt has fallen from 32 to 27%, whilst China has risen sharply from 35 to 44% in the last 3 years (see link 3). 

               2008-09     2010-13    2014-2015         
INO           31.3%        24.8%       26.0%       falling/stable
China        33.1%        36.7%       42.5%        rising
India         74.3%        69.4%        68.7%       falling/stable

Notes:
68.7% debt is not Centre debt - it includes State debt and is based on combined FD of Centre and States. Although RBI vouches for States debt - to stop a default, States have independent revenue sources, manage their own budgets and deal with political fall-out via their legislature, eg. West Bengal has debt overhang from Left rule; if it defaulted, Centre would do a "IMF type intervention". It can not give it much relief as that would jeodardize its relations with other States wanting the same.

CR HARDLY CHANGED FROM 1996 TO 2017

CR loses credibility if it is unresponsive to economic churn. It is incredible to read that CR is lower in 2017 then it was in 1990!!

Economic churn? India started running a FD from 1995, which stablised at 3% from 2000 to 2008. Debt spiked 65% to 84% from 1999 to 2003. It falls back to 68% in the next 8 years till 2011. GDP growth had increased from 5/5.5% before 2003 to 8-10% year on year till 2009. Significant worsening in 2009-2013 and structural improvements since 2014 to present, have also not changed CR either way.

FISCAL DEFICIT, GROWTH ON TARGET DEBT

FD is net borrowing. Nominal growth increases the economy, with inflation effectively reducing the value of prior debt. If FD and growth are maintained in the status quo, the debt as a percentage of GDP reaches a target figure.

Target Debt %gdp  = FD * f(gdp)    where f(gdp) = 1+ 1/gdp change 

gdp change is annual gdp growth rate expressed in local currency.
FD is percentage of GDP at end of year, expressed in local currency.

FD is central to target debt. FD is a nominal number and so it is effected by inflation. It is also affected by currency movements (for foreign currency debt) and interest cost on borrowing (see link 4).

ACTION ON ISSUES

i) Why does India run a high FD, when other countries (eg INO, China) achieve similar growths with much less FD? 

FD is falling sharply, growth is up; Quality of govt spending is vastly better due to lower corruption, targeting of benefits, timely project completions, strict monitoring to limit cost overruns, etc.

ii) If India CPI is higher for equivalent nominal GDP growth for other countries (eg. INO, China), it will have higher interest rates and greater currency depreciation. Net effect is to increase FD.

Falling CPI and better trading profile due to tighter CPI controls, import substitution, better infra, supply side improvements in agri, power, railways, etc, as also future potential of GST and supply of trained workers.

iii) Are Indian financial institutions capable of dealing with economic shocks? Is Indian economic management effective?

Big jumps in the Global Competitiveness Index including rating of financial institutions. Yet to reflect benefits of monetary policy reforms; healthier financial environment for banks, incl stronger action against financial crimes; better tax and courts admin; higher tax revenues and improved profitability of PSUs.