U.S. President Barack Obama's recent statement on the economic slowdown in India and the downgrading of the country's sovereign credit ratings by global rating agencies have stirred up a hornet's nest in India.  

The Indian government and a section of authorities have blamed the global rating agencies and foreign investors of misjudging the economy and deliberately trying to downgrade the country's image.  

The government and bureaucrats have slammed the critics, retorting that the parameters employed by them to judge India's economy are flawed as the country has very strong growth credentials, compared to its peers in the same group.

Even the adherents of the rating agencies would agree that credit rating agencies have gone off the mark on many occasions in the past, but some economists feel that the claim by the Indian authorities that it is a deliberate attempt to tarnish India's image and the argument that assessment parameters should be different don't hold ground.  

Current Status Of The Indian Economy

The sovereign credit rating by a rating agency indicates the risk level in the investing environment of a country and influences the investors' decisions when investing abroad.

At present, India's sovereign rating is BBB-, according to Standard and Poor's and Fitch, while Moody's has rated the country at Baa3. The global rating agencies have warned India of a possible downgrade from investment grade to speculative while foreign investors say policy paralysis and bureaucratic hurdles are the reasons for the country's economic slowdown.  

The Fitch Ratings revised India's outlook to negative from stable on June 18 and S&P made a similar call two months earlier. However, Moody's affirmed India's outlook as stable on June 25.

India is going through a rough patch as it recorded an economic growth of 5.3 percent - the lowest in nine years - and its currency is weak against the dollar while inflation has been on the rise in the recent months. The fiscal deficit has risen to 5.9 percent and the unemployment rate stands at 9.8 percent - the highest among the BRIC nations.

Along with this, some of the policies proposed by the government, such as a provision for retro taxing in its income tax act, have dampened investor sentiments, resulting in foreign fund outflow crippling equity markets.

A Political Talk?

Several international agencies and investors have lambasted the government for its policy gridlocks and retrospective taxing policies.

However, in the past, whenever international rating agencies changed their outlook on India's sovereign credit ratings to negative, the authorities strongly rebutted the downgrading, citing reasons such as Indian economic conditions being unlike others and needing a different yardstick to measure economic growth.

Fitch's concerns about the economic growth, inflationary pressures, and weak public finances are not placed in the context of the present state of the global economy and are based on older data, Pranab Mukherjee, the then finance minister said reacting to Fitch's move of revising the outlook.

Corporate Affairs Minister Veerappa Moily has slammed the ratings agency for the negative outlook on the country and said, There is no economic crisis in the country...Credit rating agencies will need to redesign some of their parameters and confine to those economic parameters when rating countries.

Agencies have been using political parameters too when they should stick only to economic parameters, he said.

Countering Obama's observations on the Indian economy, Moily rejoined that the President was not well-informed about the Indian economy.

Have the rating agencies actually misjudged the Indian economy? Should they use different parameters to judge India, as the Indian politicians proclaim?

The rating agencies employ a set of standard and general parameters to judge a country's sovereign rating. Though the codes and parameters differ slightly among agencies, normally the countries are rated from AAA to A- indicating top notch rankings, BBB to B- indicating medium grade ratings and CCC to D indicating junk status or risky grade ratings.

Analysts feel that the views of the Indian politicians and a section of economists on the issue are unwarranted, the arguments illogical and more of a political talk.

Rating agencies have a well-researched and designed set of standard framework to rate the countries. And these parameters take into account various important macro and micro economic, social and political indicators to account, said Jayadev Prasad Moleyar, an independent economic analyst.

Moily's statement that politics should not figure in the credit rating yardsticks is insane because it is one of the important parameters determining a country's sovereign rating, he added.

The rating agencies have refuted the government's claim that they needlessly pressed the panic button. The credit rating firms say that the allegation does not hold water because the reasons for revision of ratings are justified with facts and figures based on a country's economic and political indicators.

In a statement explaining its rationale behind the Indian ratings, Fitch said, India's favorable long-term growth prospects and the high level of foreign exchange reserves support the ratings. On the other hand, India's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings.

The credit agency said that India had a better position among its peers in the same ratings group, in terms of growth, high domestic savings, good FDI growth rate, modest external debt ratio and substantial foreign exchange reserves and much more.

Rating agencies such as Fitch and S&P are in agreement about India's strong economic credentials argument of the Indian government, but have strong concerns on the deteriorating social and political indicators.

Justifying the negative outlook, Fitch pointed out as alarming the government inertia regarding policy making, confusions on taxing laws, high corruption and dismal human development index figures.

S&P too blames the country's political uncertainty and the political confusions and constraints in its ruling party's leadership as the major obstacle to economic growth in India.

Despite its strong economic growth potential, India ranks very low when it comes to social parameters.

India stood at 134 out of 187 countries in 2011 on the U.N. Human Development Index, a steep fall from the 119th position a year ago.  The country ranks 93 out of 134 countries in terms of inequality adjusted HDI and ranks 129 out of 146 countries in terms of gender inequality index.

According to the HDI report, the country's HDI of 0.547 was below the average of 0.630 for countries in the medium human development group and below the average of 0.548 for countries in South Asia, a statistics which the third largest economy in the Asia cannot be proud off.

Continuous and unabating inflation, apart from driving at least 40% of our country's people into hunger, malnutrition and starvation, has converted India's growth story into a stagflation story, said Ram Jethmalani, eminent lawyer and veteran politician, in his column in the Sunday Guardian.

Some economists opine that the Indian government should first wake up to the deteriorating situation and take steps to improve its economic and social indicators instead of demanding new parameters from the credit rating agencies.