India’s risk spike is a temporary pause


Jeremy Weltman
Published on:

The country’s longer-term credentials are unchanged.


On track: But the risks are still clearly visible as India continues to reform

The Indian government’s chief economic adviser Arvind Subramanian has taken a pop at the rating agencies for not upgrading India’s lowest investment grade (BBB-/Baa3), saying that reforms justify improved creditworthiness.

He has a point.

Although India’s risk score is still commensurate with the lowest investment-grade ratings, independent experts are becoming more positive about investor prospects and that will soon raise India’s score in line with higher B-rated sovereigns.

Risk equivalence

A comparison of closely ranked sovereign borrowers in Euromoney’s country risk survey shows India’s lowest investment grades presently match Romania’s on a similar total risk score.

The Euromoney Country Risk (ECR) score is compiled from 15 economic, political and structural indicators, along with other ratings for factors such as capital access.

Brazil and Turkey have undergone huge problems in recent years, justifying their junk status, but Hungary has stabilized – like India – on a yearly comparison, and is similarly rated:


India’s risk score declined last year, with the trend continuing into the first months of 2017, but its ranking of 58th out of 186 countries remained unchanged and India is very close to Trinidad and Tobago, and the Philippines in risk-terms, both of which have higher ratings.

An upgrade would be sensible immediately if focusing solely on deficit and debt trends. India’s deficit has continually narrowed since 2012, and the debt-pile is less than Hungary’s in relation to their relative economic size.

However, although the risk-factor score for government finances is stable, scores for other economic indicators, including economic growth, employment, and bank and currency stability have slipped.

There are also lower scores for capital access and institutional risk.

Currency appreciation can be as concerning as depreciation.

The rupee has gained more than 5% since 2016.

That implies increased confidence in emerging markets, drawing in capital inflows, but can worsen export competitiveness at a time when there are calls for a new, more dynamic trade policy to address factors such as poor export diversification and the lack of state participation in export promotion.

And the economy lost momentum in Q1 2017, with GDP growth decelerating to 6.1% year on year from 7% in the previous quarter.

It meant GDP growth slowed to 7.1% in the fiscal year 2016/17 (to end-March) from 8% in 2015/16, with India growing at a slower pace than China in Q1 for the first time since 2014.

However, this is largely blamed on the withdrawal of rupee notes in November affecting cash payments with a lag, as the government decided to stop more than 80% of cash in circulation.

ABN Amro senior economist Arjen van Dijkhuizen, in any event, says: “The impact of demonetization may be less dramatic than the numbers would suggest at first sight.

“[It] looks to have been partly driven by a sharp increase in the GDP deflator [due to] methodological changes.”

Economic forecasters seem to agree that India’s outlook is favourable, with the IMF’s latest projections showing GDP growth accelerating through 2018 and outpacing China:


ECR’s survey experts, including ABN Amro, concur, foreseeing India stepping ahead of China again, making it the fastest growing ‘emerging giant’.

With the government introducing various business reforms, inflation under control, and the current-account deficit quite small, it means the risk-score decline might soon reverse, causing investors to refocus on its upward trend:


Debashis Acharya, professor of economics at the University of Hyderabad, believes India is going through exciting changes under prime minister Narendra Modi, whom he says “is a strong political leader, embracing inclusive policies and expediting pending reforms on finance, banking, taxation”.

There are still many longer-term issues to address.

Providing sufficient employment for a young population of more than a billion is a challenge, half of whom are below the age of 25, especially since the manufacturing sector is not expanding like it has in China.

And there are still concerns about the banking system in the light of moves to increase provisioning for bad debts, causing the deadline for compliance with Basel III regulations to be further extended.

Still, what’s more important for India “is the current political stability and political willingness in going for pending and new economic reforms”, Acharya adds. This will improve its long-term potential.

If all goes to plan, India’s risk score and credit ratings will then improve.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.