Why India has a POOR CREDIT RATING Despite being the fastest growing ECONOMY? : Detailed CaseStudy

hi everybody since the past 10 years India has seen an extraordinary growth in its economy and this is in spite of covid in spite of the Russia Ukraine war and in spite of the Israel Palestine [Music] War India means business analysts expect India to retain its position as the world's fastest growing major economy this year India will have probably the greatest growth rate the fastest growth rate economically I think uh India um has more promise than any large country in the world and this is the reason why not just Indian entities but even foreign countries and companies have applauded India for the extraordinary growth that we have achieved now whenever this extraordinary growth happens the most important benefit that we get at the global level is better credit rating as in we get the ability to borrow more money both with loans and bonds because if you look at the most developed countries in the world the core reason or the core instrument of their growth growth has been debt in fact if you look at this graph America's debt just crossed its World War II level and this is not just the case with America but even Japan China and Singapore have debt levels which are more than 100% of their GDP whereas India only has a dead to GDP ratio of 81% but you know what guys in spite of being the fifth largest economy in the world in spite of being the fastest growing economy in the world in spite of never defaulting in our history India's credit rating in the world is so bad that we fall way below countries like Peru Philippines and even kazakistan mood's investor Services cut inia Sovereign credit rating by a notch to the lowest investment grade with negative outlook India's credit rating at B2 is the second lowest investment grade score India which is one of the fastest growing economies in the world actually has one of the lowest investment grades this is the reason why we are being asked to pay thousands of crores in extra interest and foreign portfolio investment in India is getting heavily impacted eventually the Indian economy is losing thousands of crores in interest every single year and if we want to become the third largest economy we have to eradicate this obstacle before it topples us this is the reason why the Indian finance ministry has put out an entire research paper on why the Credit Agencies need to change the way they look at India so if you're a business student a consultant a UPAC student an economic student or an investor this is one of the most amazing economics case study you will ever study so in this episode today let's a deep dive and try to understand what exactly is a credit rating and why is it important why is India being discriminated by these credit rating agencies how does it cost thousands of crores to the economy of India and what are the flaws that our ministry has pointed out before we move on I want to thank my favorite sponsor of all and that is Win 12th and they are my favorite sponsor because par and I have 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want to park your money in a safe but highin instrument then use the link in the description invest in fds on win 12th and let your money grow safely and quickly and now on with the episode to understand what a credit rating is you must first understand something called Sovereign bonds and you must have seen this word sovereign bonds pop up very often in news debates so let's understand the concept of sovereign bonds using a story you see when Indian government needs money for a project they issue bonds so today if India wants to build another atel setu India would issue a 20,000 CR Bond so this Bond will be split into 10,000 units with each unit worth 2 CR rupees so when investors like you me and a foreign investor buy these units we are practically investing with the Indian government and in return every year the government will pay us interest let's say this interest is 3% and the tenure is 30 years so if you me and the foreign investor bought one unit of this Bond then for the next 30 Years each of us will receive 3% of the principal as interest so in this case every year we will get 6 lakh rupes in interest and at the end of 30 years the government will give us back 2 CR rupees of our principal so every year we will get 6 lakhs in interest and at the end of 30 years the government will return our principle of 2 CR rupees back this is how the government borrows money from the investors and Returns the money to the investors along with interest also when I own these bonds I can even trade these Bonds in the secondary Market as in after buying the bond unit for 2 CR rupees I can sell the bond to you and you will receive the interest after you buy the bond from me it's just like me selling my house to you whereby after the purchase you will get the rent for my house now the catch over here is that if the reputation of India at the global stage goes down then I will sell you this Bond at just 1 CR rupees why because I might be scared that India might not be able to return my principal so now if you bought this bond from me at 1 CR rupees the interest that you will get is still 3% of 2 CR which is 6 lakhs right so effectively you are getting an interest of 6% % and this interest is what you call as bond yield in simple words it's almost like I bought a house for 2 CR rupees which gave me a rent of 6 lakhs so my rental yield was 3% with respect to the cost of my purchase but when I sold the house to you at 1 CR rupees the house still gives you a rent of 6 lakh rupees so your rental yield is effectively 6% so the interest is what the government decides to pay you and the yield is what the market forces determine based on the reputation of the country now the question over here is as a foreign investor how will you know if a sovereign bond is risky or not in this case if you're a foreign investor how will you know if India is capable of paying back the debt or not well this is where the West became an opportunist to give us an unfair disadvantage and to give themselves an extraordinary leverage and this is where we saw the rise of credit rating agencies so there are three credit rating agencies that rate every country based on their research they are Moody fish and SNP from handing out the covered AAA credit rating to downgrading countries on the basis of a glitch in performance the ratings agencies headed by the big three of amoodi standard and paes and fit Fitch ratings is a leading Global provider of credit ratings commentary and research they each analyze how much risk cure is involved in a country's debt they assign a grade to show a country's ability to pay back their loans it is a report card but for governments the rating helps them decide whether or not they should stay in invested in a country so if you look at this chart they have a rating system that starts from AAA which indicates that the bond is of the highest quality and it goes all the way down to D which says that the country is almost about to go bankrupt so if these ratings go down then the cost of the bond in the secondary Market goes down for example let's take the hypothetical atal sedu story so in our sample case study the bond units were sold for 2 CR rupees and the interest was 3% which means 6 lakhs will be paid to investors and 2 2 CR in principle will be returned to the investors after 30 years now when the bond was issued let's say the moodies was rating India as AAA so all the investors trusted India and bought all the bond units at 2 CR rupees per unit but one fine day let's say Moody's decides to degrade India's credit rating to doubleb because they think India is not growing fast enough so now the investors who bought these bonds at 2 CR rupees might get scared and now they might decide to sell this Bond at 1.5 CR rupees in the secondary market so if you buy this Bond at 1.5 CR you will get 6 lakhs in interest which means the yield is now 4% and this is where ladies and gentlemen the entire game changes let's say India wants to build another project let's call this project the bat Mala for this again India needs 10,000 crores so again India will issue 10,000 units of bond with every unit costing 1 CR rupes each but this time the Indian government will have to provide an interest of 4% minimum why because if it gives out 3% interest then the investors will say Modi G listen we are getting a yield of 4% on your previous Bond then why should I buy this bond that is paying me only 3% interest so now India will have to increase the interest to 4% because if we don't investors won't buy our bonds and we won't have money for bat Mala so do you see what happened when the mood's downgraded India's credit rating the investors who had our bonds started selling the bonds at a low lower cost in the secondary market so the yield of our old bonds increased from 3% to 4% so now we are being forced to issue an interest of 4% for our new bonds now just so you realize the cost of this here's a calculation if we borrowed 10,000 crores at 3% interest then every year we would pay 300 cres in interest for 30 years to our investors so the total cost would be 9,000 CR in just interest but at 4% we would pay 400 crores for 30 years which increases our interest to a staggering 12,000 crores so do you see just because of Mod's downgrade in this example we have to pay 3,000 CR extra in just interest now some people over here might say that you know bro us has the reserve currency benefit but India does not have the reserve currency benefit well that is true but the fact of the matter over here is that Philippines or Peru do not have a better Financial condition as compared to India nor do they have a market which is as big as India so when India is rated below Philippines or Peru that's where the problem comes in if this is very clear to you let's look at how S&P rates India and Philippines and you will see the DraStic difference if you see this chart Philippines is rated Triple B plus by the S&P whereas if you look at India's rating India's rating stands at Triple B minus and now if you look at the 10-year bond yield of Philippines and India this is what it looks like while Philippines 10-year bond yield stands at 6.3% for India it fluctuates between 7 to 7.5% so for calculation purposes let's consider it to be 7.5 so if Philippines and India both borrow 10,000 crores for a project here's what the difference looks like for Philippines 10-year bond since it's 6.3% Philippines will pay 6.3% of 10,000 crores as in 630 crores in interest for the next 10 years whereas for India because it is 7.5 5% we will pay 750 crores in interest per year for the next 10 years so after 10 years if you see the calculation while Philippines would pay 6,300 cror in interest we would pay 7,500 cror in interest and you know what the fun fact over here is that India is 10 times bigger than Philippines in terms of population and nine times bigger than Philippines in terms of GDP and we are the fifth largest economy and the fastest growing economy in the world and Philippines is nowhere close but even then we are rated much worse as compared to Philippines this is one of the reasons why we are not able to borrow from the market at cheaper interest rates so unfortunately or fortunately this is the power of these credit rating agencies so the question over here is what exactly are the metrics based on which these credit rating agencies decide our bonds and how are we rated so low and what is the argument that the finance ministry of India has put forth for this I'm going to take the reference of this badass research paper that the finance ministry of India has presented in 2021 these graphs represent a correlation between some of the most fundamental economic parameters like GDP growth inflation and current account balance and here's what it looks like this paper shows 10 different graphs and all these graphs have the same format and if you understand this format you will quickly understand all these graphs in just 5 minutes so let's get started this is a graph that shows the relationship between the GDP growth of a particular country in the x-axis and the average credit rating of a country in the y- axis and in the y- axis you will see that the rating goes from the lowest to the highest and this line that you see is called as the trend line this line States the average credit rating of the countries with respect to their GDP growth for example normally the countries that have had a GDP growth of 7.5% have had an average rating of 3.9 and the countries that have had a GDP growth of 1.25% usually they have had a rating of 2.5 so if you look at India we've had a GDP growth of more than 6% and most countries that grew at 6% had a rating between 3.5 to 4 but shockingly if you look at our rating India stands at just one similarly if you look at this graph this shows a relation between the credit rating and the year- on-year inflation percentage of the countries so more the inflation the worse your credit rating will get in this graph the trend line says that usually when a country has a CPI inflation of around 4.5% most countries have their rating close to 2.4 but again somehow we are rated at just 1 again similarly we are also way below the trend line even in the graphs of short-term external debt and current account balance so just like this if you look at all these graphs in every single graph where a parameter of these credit rating is concerned we are way below the trend line so by looking at all these graphs you tell me guys don't you feel like India is being discriminated because all the fundamental economic parameters are on par and yet we are way below the trend line on top of that we have never defaulted on our loans and you will be shocked to know that never ever in the history has the fifth largest economy in the world had such a bad credit rating this is the reason why our finance ministry has been protesting against these credit rating agencies now some people over here might say bro this government is very corrupt or someone might say that the government is taking up a lot of debt that is the reason why we are being downgraded or some people might say bro you know what the West is going against Modi G because he is the leader of the century well both these arguments are stupid because this downgrading of India has been happening since the past 20 long years that is even during the Congress times so long story short these credit ratings have been costing our country heavily for the past 20 long years and just like these graphs that I showed you the ministry has also attached another set of graphs that have been plotted over a 20e span and the result is exactly the same that is we fall way below the trend line so now the question over here is how are these credit trading agencies openly committing such a big blunder and how are they getting away with it well they simply play the game of perceptions and if you look at this table for Moody's assessment methodologies only only five parameters I repeat only five parameters are quantitative and 13 of these parameters are qualitative which means only five of these parameters can be measured with data and the rest of the parameters are evaluated based on Expert perceptions and obviously no expert goes around every nuk and corner of the country right and this is where ladies and gentlemen the problem arises because if they talk numbers we could easily argue with numbers but if they talk perception the debate is useless so basically 13 out of these 18 assessments are impacted by judgments and perceptions similarly if you look at this table fit says that these are the weightage that they provide to all the parameters so GDP per capita has 12.4 points and government debt to GDP has 4.5 points and so on and so forth but they also go on to state that these weights are for illustrative purposes only which means this is their grading Sy system but they may just choose to not follow it at all like what nonsense is this secondly the ministry also points out that these agencies expect us to function like Western countries for example the ratings say that a country will get more points if they have more foreign investment in their Banks because public sector banks have political interference but if you look at India we need public sector Banks to cater to the lower economic stter in fact SBI and the other public sector Bank banks have been the pillar of Indian banking for a very long time and they are the reason why today a Janan yoga type idea has been wildly successful they are the reason why today every Indian has access to a bank account so India says that we cannot function like you just because you want us to we have to look at our people and Design Systems and policies accordingly and you know what lastly these agencies don't even reveal their criteria of selecting their experts so all the countries across the world are just expected to ex accept the Judgment of somebody who has been picked by an agency for some random unknown reason this is a reason why India is pushing hard to tell the world and these agencies to change their method of evaluation and to change their perspective of India so now what remains to be seen is how will these credit rating agencies react and whether they change the perception of India or not this is the story concept and the argument behind credit rating and India's answer to these agencies and I just hope you'll learn something valuable from this case study that's all from my S today guys if you learn something valuable please make sure to hit the like button in order to make you baba happy and for more such insightful business and political case studies please subscribe to our Channel and do check out the amazing fds on win 12th from the link in the description thank you so much for watching I will see you in the next one [Music] bye-bye

Channel: Think School

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Length: 19min 0sec (1140 seconds)

Published: Fri Feb 02 2024