Indians are peeved at the credit rating agencies stubbornly refusing to upgrade our sovereign rating despite our economy doing so well. The Chief Economic Adviser accused the ratings agencies of bias
for favouring China, even though its debt to gdp ratio is at 277%, compared to India's at just 67.5%. Our government points to our growth rate of over 7% of GDP, conveniently forgetting that 7% of a $2 trillion economy is much less than 6.7% growth of China's $10 trillion economy, with similar sized population. However, an analysis by Scott and Sam found that China's debt is not as alarming as it looks because most of it is local and backed by huge assets. China's rating was downgraded by Moody's last month. The ratings agencies pushed back, saying that although government debt has decreased from 84.7% of GDP in 2003 to 67.5% in 2016 it is still higher than that of the Bahamas and South Africa, countries with the same credit rating. "We view ongoing central government deficit as supportive of India's credit profile," said Moody's. "However, the recent widening of Indian state deficits has more than offset the narrowing of the central government deficit." Perhaps, out of politeness they do not mention that much of the debt reduction was due to very high retail inflation we suffered between 2006 and 2015. Inflation reduces government debt by increasing tax collections. There are several levels of debt in India. According to the Reserve Bank, the fiscal deficit of our states has increased to 3.2%, instead of coming down to 2.6%. To raise money states are selling bonds at huge premium of 100 basis points above yields on sovereign bonds. The Central government has pledged to compensate states for any shortfall in revenues due to the impending Goods and Services Tax, so it remains to be seen whether the government can keep fiscal deficit at 3%, as they are promising. More than a third of indirect taxes are not being included in the GST. States could increase taxes on these products. leading to inflation, or a fall in sales, leading to lower tax collections. Another level of debt is in our banks, which are sitting on massive amounts of bad loans. Banks are warning the government that over a trillion rupees worth of loans to telecom companies are at risk. This is due to deep price cuts by Reliance Jio, a new company launched last year. With a billion mobile connections surely no telecom company will default on its debt? Reliance Communications, or RCom, has just defaulted on its debt of $7 billion. RCom's credit rating has been junked. We should be careful before getting angry.
for favouring China, even though its debt to gdp ratio is at 277%, compared to India's at just 67.5%. Our government points to our growth rate of over 7% of GDP, conveniently forgetting that 7% of a $2 trillion economy is much less than 6.7% growth of China's $10 trillion economy, with similar sized population. However, an analysis by Scott and Sam found that China's debt is not as alarming as it looks because most of it is local and backed by huge assets. China's rating was downgraded by Moody's last month. The ratings agencies pushed back, saying that although government debt has decreased from 84.7% of GDP in 2003 to 67.5% in 2016 it is still higher than that of the Bahamas and South Africa, countries with the same credit rating. "We view ongoing central government deficit as supportive of India's credit profile," said Moody's. "However, the recent widening of Indian state deficits has more than offset the narrowing of the central government deficit." Perhaps, out of politeness they do not mention that much of the debt reduction was due to very high retail inflation we suffered between 2006 and 2015. Inflation reduces government debt by increasing tax collections. There are several levels of debt in India. According to the Reserve Bank, the fiscal deficit of our states has increased to 3.2%, instead of coming down to 2.6%. To raise money states are selling bonds at huge premium of 100 basis points above yields on sovereign bonds. The Central government has pledged to compensate states for any shortfall in revenues due to the impending Goods and Services Tax, so it remains to be seen whether the government can keep fiscal deficit at 3%, as they are promising. More than a third of indirect taxes are not being included in the GST. States could increase taxes on these products. leading to inflation, or a fall in sales, leading to lower tax collections. Another level of debt is in our banks, which are sitting on massive amounts of bad loans. Banks are warning the government that over a trillion rupees worth of loans to telecom companies are at risk. This is due to deep price cuts by Reliance Jio, a new company launched last year. With a billion mobile connections surely no telecom company will default on its debt? Reliance Communications, or RCom, has just defaulted on its debt of $7 billion. RCom's credit rating has been junked. We should be careful before getting angry.
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