Arvind Subramanian slams global rating agencies for favouring China, ignoring India's economic fundamentals

Chief Economic Advisor Arvind Subramanian on Thursday slammed global rating agencies for not upgrading India despite clear indications of improvement in country's economy.  Subramanian said that the ratings agencies favoured China over India even though India had fared better in terms of inflation and growth.

"In recent years, rating agencies have maintained India's BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance). At the same time, China's rating has actually been upgraded to AA-, even though its fundamentals have deteriorated," Subramanian said.

Subramanian made the remarks during the Dr VKRV Memorial lecture on 'Competence, Truth and Power: Macro-economic Commentary in India' in Bengaluru. During the lecture, Subramanian made a strong case against the ratings agency saying their role had increasingly come into question.

"In recent years, the role of ratings agencies has increasingly come into question. In the US financial crisis, questions were raised about their role in certifying as AAA bundles of mortgage-backed securities that had toxic underlying assets (described in Michael Lewis' The Big Short). Similarly, their value has been questioned in light of their failure to provide warnings in advance of financial crises. Often ratings downgrades have occurred post facto, a case of closing the stable doors after the horses have bolted," he said.

Pointing out the discrepancy in the way rating agencies dealt with India and China, Subramanian said if there was any need to take the agencies seriously at all. "In other words, the ratings agencies have been inconsistent in their treatment of China and India. Given this record-what we call Poor Standards--my question is: why do we take these rating analysts seriously at all?" he said.

Budget

Subramanian also took a dig at economists and analysts at home, saying how opinions changed before and after the government announced a policy. He cited the examples of the past two budgets under the Modi-led government to prove his point.

"Before the 2016-17 and 2017-18 budgets were announced, outside views spanned the spectrum. Some urged the government to stick to the pre-announced target, others to go slow on consolidation; some even asked for expanding the deficit, especially this year, given the weakness of the economy after demonetisation," he said.

He added: "Yet whatever their initial view, once the budget was announced, commentators almost uniformly endorsed the actual government policy. One would have thought that they would at least be mildly embarrassed by their change of views. But they gave no sign of such embarrassment; indeed, they didn't even admit they had changed their views."

Demonetisation and monetary policy

Subramanian, further, highlighted the inconsistency in opinion of analysts on demonetisation and monetary policy. "After de-monetisation, a consensus had built up amongst the investor community and the economic analysts that the RBI would cut interest rates... It turned out that the MPC did not cut. Instead in December, it signaled a more hawkish stance (going from accommodative to neutral), and since then has maintained that stance," he said.

He further said: "Yet instead of criticizing the official decisions, as consistency would demand, analysts found ex-post logic to attribute merit to these decisions. That is, far from criticizing the central bank for holding rates constant over the past three announcements, analysts praised the policy stance as prudent and helpful in boosting the credibility of the inflation-targeting framework."

Subramanian concluded his lecture saying: "We need more disinterested voices-especially universities and independent researchers that are distant from and not dependent upon the apparatus of power-to speak up."

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