Indian Officials To Meet Moody’s For Rating Upgrade; The Dangers of Government Intervention in Credit Ratings

Credit ratings play a crucial role in the financial system, providing investors with insights into the creditworthiness of countries and companies. However, when governments intervene in credit ratings, it raises concerns about the integrity and independence of these assessments. So what are the concerns that this move may give rise to and to and the risks associated with government intervention in credit ratings, focusing on India’s recent efforts to pitch for a sovereign rating upgrade?

The Governments Point Of View

India’s Economic Fundamentals and Rating Upgrade Pitch      

Moody’s Investors Service currently assigns India a ‘Baa3’ sovereign credit rating, the lowest investment grade rating, with a stable outlook.

In an attempt to secure a rating upgrade, officials from the Finance Ministry are set to meet with Moody’s representatives on June 16. They plan to showcase India’s strong economic fundamentals, including ongoing economic reforms, government emphasis on infrastructure development, and forex reserves nearing USD 600 billion.

Fiscal Objectives and Deficit Reduction
Over the past two years, the Indian government has largely met its fiscal objectives. The fiscal deficit, which measures the gap between government expenditure and revenue, decreased from 6.7 per cent of GDP in the 2021-22 fiscal year to 6.4 per cent of GDP in 2022-23. For the current fiscal year, the deficit is budgeted at 5.9 per cent of GDP.

The government aims to further reduce the fiscal deficit to below 4.5 per cent of GDP by 2025-26, as outlined in its fiscal consolidation roadmap.

Credit Ratings and Investors’ Perspective
Three global rating agencies, namely Fitch, S&P, and Moody’s, have assigned India the lowest investment grade rating with a stable outlook. Investors consider these ratings as indicators of a country’s creditworthiness, and they impact borrowing costs. Therefore, a rating upgrade is seen as a positive development, potentially attracting more investment and reducing borrowing costs for the Indian government.

Moody’s Growth Projections and Fiscal Risks

Moody’s Investors Service Associate Managing Director, Gene Fang, projected a 6-6.3 per cent economic growth for India in the June quarter. However, he also highlighted the risks of fiscal slippage due to weaker-than-expected government revenues in the current fiscal year.
Moody projects economic growth at 6.1 per cent and 6.3 per cent for the full 2023-24 and 2024-25 fiscal years, respectively. On a calendar year basis, Moody’s expects growth to be 5.5 per cent in 2023, with a potential improvement to 6.5 per cent in 2024.

What Are The Concerns If Govt’s Start Influencing Ratings?

Maintaining Rating Independence, The independence of credit rating agencies is crucial to ensure unbiased assessments. Government interference in credit ratings can raise doubts about the objectivity of these evaluations. When governments attempt to influence ratings to improve their creditworthiness, it undermines the integrity of the rating process and erodes investor confidence.

Conflict of Interest, When governments intervene in credit ratings, there is a potential conflict of interest. Governments may have political motivations to present an inflated creditworthiness to attract investments or lower borrowing costs. Such actions can lead to a misrepresentation of the true financial health of a country, putting investors at risk and distorting market signals.

Diminished Market Confidence, Government intervention in credit ratings can create doubts about the credibility and reliability of the ratings themselves. Investors rely on independent credit assessments to make informed decisions. If governments interfere in the process, it undermines the trust in credit ratings and reduces market confidence. This, in turn, can lead to market inefficiencies and distortions.

Undermining Accountability, Credit rating agencies must be accountable for their assessments and maintain transparency in their methodologies. Government intervention can dilute this accountability by exerting pressure on rating agencies to provide favourable ratings. This can lead to inadequate scrutiny of a country’s financial performance, potentially masking underlying risks and vulnerabilities.

Impaired Risk Management, Accurate credit ratings are essential for effective risk management in financial markets. Investors use these ratings to assess the risk associated with investing in specific countries or companies. If governments manipulate ratings, it distorts the risk-reward equation, leading to mispriced assets and potentially exposing investors to higher levels of risk. This can have far-reaching consequences for the stability of financial systems.

Distorted Market Signals, Credit ratings serve as important market signals, reflecting the financial health and creditworthiness of entities. Government intervention can distort these signals by creating an artificial impression of a country’s creditworthiness. This can result in misallocated capital, as investors may make decisions based on inaccurate ratings, leading to potentially unsustainable investments and market imbalances.

Long-Term Economic Impact, Intervening in credit ratings can have long-term economic repercussions. By artificially inflating creditworthiness, governments may encourage excessive borrowing and spending, potentially leading to unsustainable debt levels. Such practices can hinder economic growth, erode fiscal discipline, and undermine investor confidence in the long run.

Loss of Investor Protection, Government intervention in credit ratings can undermine investor protection mechanisms. Investors rely on independent credit assessments to make informed decisions and mitigate risks. When governments manipulate ratings, investors may be exposed to higher levels of risk without adequate warning or information, potentially leading to significant financial losses.

The Last Bit, Government intervention in credit ratings poses significant risks to the integrity of the financial system, and the example of India’s efforts to influence its sovereign rating serves as a cautionary tale.

Independence, objectivity, and transparency are critical for maintaining the credibility of credit rating agencies, and governments of individual countries should respect the autonomy of these agencies and avoid interference to preserve the integrity of credit ratings. This is important so they can foster trust, ensure accurate risk assessments, and promote stable and sustainable economic growth.