Sovereign rating methods are biased towards advanced economies: VA Nageswaran

V Anantha Nageswaran, the government's principal economic adviser, has advocated for a revamp of the methodologies employed by credit rating agencies in assigning sovereign ratings. In a recent paper co-authored with senior government adviser Rajiv Mishra, Nageswaran contends that the existing methodologies exhibit a bias towards advanced economies, thereby undermining the creditworthiness assessments of developing nations.

The authors underscored the need for greater transparency from rating agencies such as Fitch Ratings, Moody's, and S&P Global Ratings. They argued that the lack of clarity surrounding these agencies' evaluation criteria fosters ambiguity and potentially fuels suspicions of discriminatory practices. Despite experiencing relatively mild economic downturns compared to advanced economies, developing nations have reportedly accounted for over 95 per cent of all sovereign rating downgrades.

Highlighting India's case, the paper pointed out that the country's sovereign rating has remained static at BBB- for the past 15 years, despite its ascent to becoming the world's fifth-largest economy from a 12th-place ranking in 2008. 

Responding to the assertions, a spokesperson for Fitch Ratings emphasised that the agency's sovereign rating decisions are grounded in independent, transparent, and consistent analysis. The spokesperson reiterated that Fitch adheres to globally consistent criteria for sovereign ratings, with all relevant factors delineated in public commentary.

Conversely, representatives from S&P Global Ratings declined to provide a comment, and Moody's did not respond to inquiries.

The paper further highlighted the adverse implications of lower sovereign ratings for developing countries, restricting their access to affordable long-term financing from global markets.

Carbon tax implications

In a separate publication, Nageswaran voiced concerns over unilateral measures adopted by developed nations, such as the proposed Carbon Border Adjustment Mechanism (CBAM) by the European Union. He argued that such initiatives, aimed at taxing high-carbon imports like steel, cement, and electricity, could stymie the growth prospects of developing nations.

Nageswaran urged developed countries to collaborate with their developing counterparts in areas like innovation, research, and technology transfer. He recommended that revenues generated from mechanisms like CBAM be channelled towards facilitating access to climate-friendly technologies for developing nations.

(With Reuters inputs)