Notes on India's default risk

Feb 10, 2010

Rating agencies models have come under severe scrutiny in the recent years after their track record on issues related to the sub-prime crisis.

In Financial Express column, Vaidyanathan argues that “When Greece gets a higher credit rating than India, there is a problem”.  He observers that current rating of India at BBB- has a greater likelihood of default than Greece at BBB+. While the credit ratings believe that default risk is quiet high for India, despite its economic run in the recent years.

I believe the above argument gets off-track from economics and is far more of ‘playing to the gallery’ than real contribution to understanding of the mechanics of sovereign credit ratings.

A country’s credit rating is determined by these set of factors, as research suggests [1]:  per capita income, GDP growth, inflation, external debt, level of economic development, and default history. Given that India has been seen impressive performance on certain factors like GDP growth in the recent times, the amount of economic development as measured by various agencies like World Bank or IMF, continues to group us in the bottom quartile along with sub-saharan Africa or South east Asia. This is the primary reason for a poor rating for India’s paper. While, Indian economists seem to look away is the fact of equitable social and economic development as they are clearly writing what people want to hear in Urban India, 'India’s relentless march towards economic superpower status’.

Greece on the other hand would far well on the qualitative factors such as default history and economic development. If we look at a specific factor like fiscal deficit, Greece is on par with US in their deficit at about 10%. While US has been rated the safest rating, and recent comments from US Treasury that they would never face a downgrade. That statement is quite true given that they are free to print as much currency to pay back their obligations, without a direct material impact on their economy.

[1] Cantor, Richard Martin and Packer , Frank, Determinants and Impact of Sovereign Credit Ratings (October 1996). Economic Policy Review, Vol. 2, No. 2, October 1996. Available at SSRN: