India's economic adviser calls for review of sovereign ratings methods

In a document issued on Thursday, the Indian government’s main economic advisor urged for revisions to the way credit rating companies assign sovereign ratings, claiming that their current procedures favour advanced economies.

In the document, V Anantha Nageswaran, a senior government adviser, suggested that rating firms should publish their methodology so that countries might take appropriate action to improve their credit ratings.

“… Any improvement in macro-economic parameters may virtually mean nothing for a credit rating if qualitative parameters are judged to be in need of improvement,” it said.

According to Nageswaran and Mishra, ambiguity in the approach employed by credit rating agencies such as Fitch Ratings, Moody’s, and S&P Global Ratings risks “sowing suspicion about… discriminatory intent.” They claim that despite enduring milder economic contractions than industrialised economies, developing countries have seen over 95% of all downgrades.

According to the article, India’s ratings have remained steady at BBB- for 15 years, despite the fact that its economy has risen to become the world’s fifth-largest from 12th place in 2008.

According to a representative for Fitch Ratings, rating determinations are based on independent, comprehensive, transparent, and timely examination.

“All Fitch’s sovereign rating decisions are taken solely in accordance with one globally consistent and publicly available rating criteria, with rating drivers and sensitivities clearly identified in our ongoing public rating commentary,” the spokesperson said in emailed comments.

An S&P Global Ratings spokesperson declined to comment, while Moody’s did not respond to an email seeking comments.

Lower ratings make it difficult for developing countries to access cheaper long-term funding from international markets, the paper said.

Carbon Tax

In a different paper shared by the economic adviser’s office, Nageswaran wrote that unilateral measures by developed countries such as cross-border carbon taxes and initiatives to impose strict data reporting requirements would hurt the competitiveness and hinder the growth of developing nations.

The European Union in April announced a plan to impose a levy called the Carbon Border Adjustment Mechanism (CBAM) on high-carbon goods imports from 2026, targeting imports of steel, cement, aluminum, fertilisers, electricity, and hydrogen. Britain also held consultations earlier this year with domestic stakeholders on a potential carbon border tax.

Nageswaran said developed countries should engage with their developing counterparts in innovation, research and development and use their resources – like the revenues earned from CBAM – to help them access climate technologies.