“The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” the agency said in a statement on Wednesday.

 

Subramanian pointed out the rating disparity in a section in the Economic Survey. In a section of the opening chapter, on some “interesting facts about Indian economy”, he noted “Biases in perception”: “The credit rating, which determines the risk level of the investing environment of a country, of China was upgraded from A+ to AA- in December 2010, while India’s has remained unchanged at BBB-. From 2009 to 2015, China’s credit-to-GDP (the ratio of a country's public debt to its GDP, which indicates a country’s ability to pay back its debt) soared from about 142 percent to 205 percent and its growth decelerated. In contrast, India’s credit-to-GDP, more or less, remained the same.”  

 

More recently, delivering the VKRV Memorial Lecture in Bengaluru on May 11, he once again took up the theme.

 

“Before I talk about Indian experts, let me begin by highlighting one of the most egregious examples of compromised analysis: the assessments of the international ratings agencies.

 

“In recent years, the role of ratings agencies has increasingly come into question. In the US financial crisis, questions were raised about their role in certifying as AAA bundles of mortgage-backed securities that had toxic underlying assets (described in Michael Lewis’ The Big Short). Similarly, their value has been questioned in light of their failure to provide warnings in advance of financial crises. Often ratings downgrades have occurred post facto, a case of closing the stable doors after the horses have bolted.

 

“In recent years, rating agencies have maintained India’s BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance). At the same time, China’s rating has actually been upgraded to AA-, even though its fundamentals have deteriorated, as these charts from the Economic Survey show.

 

“In other words, the ratings agencies have been inconsistent in their treatment of China and India. Given this record—what we call Poor Standards--my question is: why do we take these rating analysts seriously at all?

 

After the Moody’s announcement, Subramanian made a reference to the analysis in the Economic Survey.