This article has been modified. Please read the correction at the end.
Ever since the global economic meltdown of 2008, the veracity of the ratings business has been under fire. Rating agencies, after all, consistently attached triple As to sub-prime debt instruments until it was clear that they were mostly junk, and accorded debt of countries like Greece top-notch ratings. None of this appears to have deterred India’s Chief Economic Advisor Kaushik Basu. At the end of January, the Cornell professor, who has six months of his tenure to run, announced the Comparative Rating Index of Sovereigns (CRIS).
Developed by five economists in the finance ministry’s department of economic affairs under Basu’s stewardship, CRIS has added a new dimension to the debate over the credibility and acceptability of ratings. Revealed in part – the details are expected to be unveiled in the Economic Survey that is presented to Parliament on March 15 – it is designed to offer investors a comparative score of countries on a percentile basis (“the way GRE results are given”, a press release helpfully explains).
The relative rating index has ranked 101 economies for the years 2007 to 2011 based on the historical evolution of their ratings over five years and the volume of their economic activity as measured by their GDP (not adjusted for Purchasing Power Parity or PPP).
It’s an elaborate exercise that took three to four months to develop. But is it needed? That’s the question that has raised a debate. Basu says the basic premise for developing CRIS is that major credit rating agencies give out the sovereign credit rating of each nation as an absolute grade. So how other nations fare does not matter in a particular nation’s rating score. “It is arguable that even for sovereign credit ratings there is a case for providing some kind of comparative score,” he adds.
Thus, when an investor searches across nations for a place to put her money, the relative rating of nations is important. The finance ministry’s press release illustrates the issue: If nation i’s rating remains the same and other nations’ ratings improve over time, there may well be a case to invest less in nation i.
“Over the last five years, the global economy has gone through lots of highs and lows. Nations have moved up and down the ratings ladder. This makes it entirely possible that a particular nation that has had no rating change may now be better off or worse off in comparative terms,” the press release explains. Also, a nation that has travelled down the rating ladder in absolute terms may be, in relative terms, better off because others have done even worse. CRIS is designed to capture precisely this idea.
“This is a very interesting and different way to look at sovereign ratings; it contains the germ of an idea that somebody could work on and refine to come up with a composite comparative rating,” said Jacob Mathew, managing director of MAPE Advisory Group. The exercise is also, he adds, timely, especially when sovereign ratings are under intense scrutiny all over the world.”
But there could be a problem with the methodology. Mathew says putting together Moody’s ratings and GDP growth over a longer time frame does offer unique perspectives, but also raises some moot points. “Aren’t these two [GDP growth & Moody’s ratings] somewhat of a linked metric to start with? Do we need to look at other metrics also,” he asks.
Acceptability is another issue. As Pronab Sen, currently principal advisor to the Planning Commission and former Chief Statistician, points out, this exercise indicates that we are sticking our neck out. “If we would have done it as part of a group then it would have worked better — it would have had greater saleability and credibility,” he says.
As it is, the CRIS findings shows that in relative terms India had become a better investment destination by 5.06 per cent. In addition, India’s rank has moved up from 61st to 55th. “Everybody would be suspicious that you have done it to boost yourself,” Sen points out.
If the genesis of CRIS lies in projecting India as a better destination, India economist at Bank of America Merrill Lynch Indranil Sengupta hints that it is probably redundant. “We would argue that the global markets have already accepted the fundamental point made by the CRIS index of India moving faster than other countries almost 10 years ago. However, acceptability of the index vis-à-vis more established indices may be more difficult. We expect India to scale up to China’s current economic size by 2020,” he says.
Adds Mathew, “I don’t think it has practical significance in deciding investment locations. Sovereign ratings and investment flows are often quite unrelated. India has had poor ratings all through the last decade, but has been and continues to be one of the top investment destinations for FDI [foreign direct investment] and FII [foreign institutional investor] inflows.”
So will CRIS have any utility at all? Atsi Sheth, vice-president and senior analyst of Moody’s Investor Service, points out that sovereign ratings are indicators of relative creditworthiness of countries while CRIS aims to track how sovereign ratings themselves have moved over time. “Therefore, their respective use depends on the question one wants to answer,” she stresses, adding that Moody’s ratings are only one input in CRIS.
Basu, though, remains unflaggingly optimistic that he’s established a solid legacy. He says going forward, CRIS could use data and ratings of other rating agencies besides Moody’s. The chief economic advisor also believes that CRIS could be developed into a full-fledged rating system like any other in the business. Much will depend on how much his successor buys into it.
Correction
This column had wrongly described Kaushik Basu as a Yale professor. Dr Basu is, in fact, with Cornell University. We apologise for the error.
