Home World Economy Will World Bank’s affirmation for Modi’s reforms now persuade credit rating agencies?

Will World Bank’s affirmation for Modi’s reforms now persuade credit rating agencies?


India’s leap of of 30 spots to the 100th rank in the World Bank‘s Ease of Doing Business report for 2018 is seen as an affirmation of the country’s efforts to reform and streamline the economy. While the World Bank’s acknowledgment that Prime Minister Narendra Modi‘s reforms push is bearing fruit will silence most of his critics in India, will it impact India’s overall economic image?

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 such as Moody’s, Standard & Poor’s and Fitch despite the government pitching hard for an upgrade on the basis of several reforms initiated over the last few years.

In May this year, Fitch affirmed India’s ‘BBB-‘ rating, blaming India’s weak public finances for constraining the rating. In November last year, both S&P and Moody’s had affirmed similar ratings.

Will India’s biggest jump in a year in the Ease of Doing Business rankings persuade these agencies to upgrade India rating?

India’s improved ranking does not indicate improvement in the conditions that concern rating agencies, such as debt-to-GDP ratio, the state of public finances and per capita GDP. Yet business environment is also a major factor for rating agencies.

When Fitch affirmed India’s ‘BBB-‘ rating in May it also blamed India’s difficult business environment. This is what Thomas Rookmaaker, Director, Sovereign Ratings, Fitch Ratings, had told ET in May: “We do recognise that a lot is happening on that front but at the same time we have to realise that the business environment in India is relatively difficult. If you for instance look at the ease of doing business indicator of the world bank which is just one of many indicators, India ranks as one of the lowest if not the lowest of all the BBB category rated countries.”

Clearly, ease of doing business is a significant factor for rating agencies. Rookmaaker indicated that Fitch took notice of big reforms by Indian government but they did not mean much without improved business environment. “…if I talk to people, for instance, in Hong Kong where I live, and I ask businessmen who do business all over Asia and ask them in which countries do you find it difficult to do business, one of the countries that is regularly mentioned is India,” he said.

Rookmaaker’s comments mean ease of doing business is indeed a big criterion for the rating agencies even though debt and public finances remain the main issues.

While the government has tried to convince the rating agencies in the past about the changes happening on the ground, now the World Bank ranking should address their concerns.

India has for long criticised western rating agencies. In May, chief economic advisor Arvind Subramanian voiced what Indian government had been feeling for long—the western rating agencies are unfair towards India. He said the methodology of the ratings firms was “one of the most egregious examples of compromised analysis.” The immediate reason behind his outburst was US-based agency Fitch keeping India’s sovereign rating at ‘BBB-‘. It’s a rating India was assigned more than a decade ago.


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