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Subject: Economics

  • SEBI’s Proposal for T+0 Instant Settlement Cycles

    Central Idea

    • The Securities and Exchange Board of India (SEBI) has proposed introducing T+0 (same day) and instant settlement cycles in the equity cash segment, alongside the existing T+1 cycle.

    Current Settlement Cycle  

    • Evolution: SEBI shortened the settlement cycle from T+5 to T+3 in 2002, and then to T+2 in 2003. The T+1 cycle was introduced in 2021 and fully implemented by January 2023.
    • T+1 Cycle: Currently, the settlement of funds and securities occurs on the next day after the trade.

    About T+0 Settlement Cycle

    • Phased Implementation: SEBI plans to introduce the shorter cycle in two phases: Phase 1 with T+0 Settlement and Phase 2 with Instant Settlement.
    • T+0 Settlement Details: In Phase 1, trades executed until 1:30 PM will be settled by 4:30 PM on the same day.
    • Instant Settlement Mechanics: Phase 2 envisages immediate trade-by-trade settlement, with trading continuing until 3:30 PM.

    Scope and Implementation

    • Initial Focus: Initially, the T+0 settlement will be available for the top 500 listed equity shares based on market capitalization, implemented in three tranches.
    • Surveillance Measures: The same surveillance measures applicable in the T+1 cycle will apply to the T+0 cycle. Trade-for-trade settlement securities will not be eligible for T+0.

    Rationale behind Introducing a Shorter Settlement Cycle

    • Market Growth and Efficiency: With the significant growth in market volumes and participants, SEBI aims to enhance market efficiency and safety, especially for retail investors.
    • Technological Advancements: The evolution of payment systems like UPI and the sophistication of market infrastructure support the feasibility of shorter settlement cycles.
    • Investor Attraction: Faster transactions, reliability, and low costs are key factors that attract investors, making Indian securities a more appealing asset class.

    Features of the Proposed T+0 Settlement Mechanism

    • Early Pay-In Trend: A large percentage of retail investors already make early pay-ins of funds and securities, indicating readiness for instant settlement.
    • Instant Receipt Benefits: The mechanism enables instant receipt of funds and securities, reducing settlement shortages and enhancing investor control.
    • Investor Protection: Direct crediting of funds and securities into investors’ accounts, especially for UPI clients, strengthens investor protection.

    Benefits of the New Mechanism

    • Flexibility for Clients: The new mechanism offers faster payouts of funds to sellers and securities to buyers, providing greater flexibility and control.
    • Market Ecosystem Advantages: The faster settlement cycle is expected to enhance the operational efficiency of the securities market, benefiting the entire ecosystem.

  • India’s Steel Sector: Advancements, Challenges, and Global Position in 2024

    steel

    Central Idea

    • The Indian government is focusing on the steel sector with the Production Linked Incentive (PLI) scheme 2.0 and ensuring raw material supply in 2024.
    • Minister of State for Steel highlighted these initiatives, emphasizing the promotion of scrap usage in steel production.

    Growth and Recovery Post-Pandemic

    • Resilience: The steel sector has shown a strong recovery following the impact of the COVID-19 pandemic in 2020-21.
    • Production and Consumption: From April to November 2023, crude steel production increased by 14.5% y-o-y to 94.01 Million Tonnes (MT), and finished steel consumption rose by 14% to 86.97 MT.

    Targets and Technological Advancements

    • Capacity Goal: India aims to reach an installed steel manufacturing capacity of 300 MT by 2030, currently at around 161 MT.
    • Innovation: Efforts are underway to integrate artificial intelligence and new technologies to enhance steel output and reduce carbon emissions.

    PLI Scheme and Industry Expansion

    • PLI Scheme 1.0: The first phase aimed to boost speciality steel production, creating an additional capacity of around 25 MT.
    • Capacity Increase: Steel players are expanding their capacities, with the government facilitating project clearances and easing business operations.

    Challenges and Concerns

    • Rising Imports and Costs: The industry faces challenges with increasing imports, high raw material prices, and geopolitical uncertainties.
    • Dependency: India relies heavily on imports for coking coal, a critical raw material for steel production.

    Global Steel Industry and India’s Role

    • India’s Growth: India, the world’s second-largest steel producer, has shown robust growth, significantly contributing to the global steel industry.
    • Comparison with China: While China remains the largest producer, India has outpaced China in terms of growth rate in recent years.

    Demand and Import Dynamics

    • Sectoral Demand: The construction sector, driven by government infrastructure spending and private investment, leads the demand for steel in India.
    • Import Measures: The government has implemented anti-dumping duties and other barriers to address steel dumping, particularly from China and Vietnam.

    Price Trends and Future Outlook

    • Domestic Prices: Indian steel prices have increased due to strong demand, but global uncertainties may impact future price hikes.
    • Global Market Influence: Domestic pricing trends may be influenced by global economic recovery and price movements in the US and Europe.

    Conclusion

    • Strategic Focus: The Indian government’s initiatives, like the PLI scheme, aim to strengthen the steel sector’s global competitiveness and self-reliance.
    • Balancing Growth and Challenges: While the sector shows promising growth, addressing challenges like raw material dependency and import pressures remains crucial.
    • Global Positioning: India’s significant role in the global steel market underscores its potential to influence industry trends and drive economic growth.

  • Development led by corporates, not women

    G-20 Summit | New Delhi declaration accepts disproportionate impact of climate change on women - The Hindu

    Central idea 

    The article critiques the G20 Summit’s Declaration on women’s empowerment, highlighting past implementation challenges and questioning the clarity of “women-led development.” It emphasizes the discrepancy between rhetoric and actions, especially regarding declining budget allocations for women’s development. The central theme revolves around the need for a reevaluation of women-led development strategies to address persistent inequalities effectively.

    Key Highlights:

    • The G20 Summit’s Declaration on the empowerment of women is acknowledged, but past working groups and sustainable development goals have seen limited implementation.
    • The term “women-led development” in the Declaration lacks clarity, and the article questions its parameters and implications for the existing development models.
    • The G20 Declaration reaffirms the role of private enterprise in driving economic growth, raising concerns about the compatibility of women-led development with the prevailing macroeconomic model.

    Key Challenges:

    • The article highlights the persistent discrimination against women and girls globally, emphasizing the need for more effective measures to achieve Sustainable Development Goals.
    • Women-led development schemes, as mentioned in government bulletins, are criticized for masking the reduction in government investment in projects benefiting women’s development.
    • The Gender Budget, intended to prioritize women’s development, has shown a decline in total expenditure, raising concerns about the commitment to women-led development.

    Key Terms/Phrases:

    • Women-led development
    • Sustainable Development Goals (SDGs)
    • Trickle-down theory
    • G20 Summit Declaration
    • Gender Budget
    • Private enterprise
    • Corporate-led development

    Key Quotes for value addition:

    • “At the midway point to 2030, the global progress on SDGs is off-track with only 12% of the targets on track.”
    • “We encourage women-led development and remain committed to enhancing women’s full, equal, effective, and meaningful participation…”

    Key Statements:

    • The article questions the lack of clarity in the term “women-led development” and its compatibility with existing development models.
    • Concerns are raised about the reduction in the Gender Budget and the inadequate allocation for wholly women-specific schemes.

    Key Examples and References:

    • The article cites the decline in women’s share in regular waged work in India according to the Periodic Labour Force Survey (PLFS).
    • Specific government schemes and budgetary allocations are referenced to illustrate the disparities in women-led development.

    Key Facts/Data:

    • The total Gender Budget for 2023-2024 was reduced from 5.2% of the total expenditure the previous year to 5%.
    • The share of women in regular waged work in India fell from 21.9% in 2018-2019 to 15.9% in 2022-2023.

    Critical Analysis:

    • The article critically examines the discrepancies between rhetoric and action in women-led development, highlighting concerns about declining budget allocations and the lack of clarity in the proposed development model.

    Way Forward:

    • The need for a reevaluation of women-led development strategies is emphasized, urging policymakers to prioritize economic independence for women and address the disparities in budgetary allocations.

  • A new economics for inclusive growth

    Elements of Inclusive growth - INSIGHTSIAS

    Central idea 

    The central idea urges a reevaluation of India’s economic strategy, emphasizing the necessity to shift from an exclusive focus on high-end skills to inclusive growth. It underscores the mismatch between skills, jobs, and incomes and advocates prioritizing the small-scale manufacturing sector to foster sustainable and locally enriched economic development. The article suggests seizing the opportunity to attract producers and meet unmet needs for India’s growth.

    Key Highlights:

    • The book “Breaking the Mould: Reimagining India’s Economic Future” suggests a shift from manufacturing to exporting high-end services, challenging traditional economic strategies.
    • The mismatch between skills, jobs, and incomes is identified as a major obstacle to India’s growth, reflecting in social and political demands for better wages and security.
    • The growth pattern focusing on high-end skills has not generated sufficient decent jobs for the majority of India’s population.

    Key Challenges:

    • The Achilles heel of India’s economy is insufficient jobs and incomes, evident in demands from various sectors for fair wages and social security.
    • A critical mismatch between skills, jobs, and incomes poses a significant challenge to India’s growth and economic well-being.
    • The reliance on high-end skills has not translated into enough decent jobs for the majority, hindering inclusive growth.

    Key Terms and Phrases:

    • Leapfrogging manufacturing in favor of exporting high-end services.
    • Mismatch between skills, jobs, and incomes.
    • “India was Shining” era and its economic implications.
    • Inclusive and sustainable economic growth.
    • Small-scale and informal manufacturing sector.
    • The importance of richness of economic activity within local webs.

    Key Quotes:

    • “India cannot afford to neglect its small-scale and informal manufacturing sector any longer.”
    • “Investing in education and skills for ‘high end’ manufacturing and services will not benefit the masses if they cannot be employed.”
    • “There are no shortcuts to inclusive economic growth.”

    Key Statements:

    • The book’s recommendation challenges India’s traditional approach to economic development.
    • The focus on high-end skills has not translated into inclusive growth or sufficient employment opportunities.
    • Policymakers must reimagine the path for India’s growth and prioritize inclusive economic growth.

    Key Examples and References:

    • Reference to the book “Breaking the Mould: Reimagining India’s Economic Future” by Raghuram Rajan and Rohit Lamba.
    • Examples of social and political demands for better wages and security in various sectors.
    • Mention of the mismatch between India’s skills development and job creation.

    Key Facts and Data:

    • 60% of Indians are classified as “economically weaker sections” entitled to job reservations.
    • India invested in world-class institutions of science and engineering 70 years ago.
    • The growth pattern focusing on high-end skills has not generated sufficient decent jobs for India’s masses.

    Critical Analysis:

    • The article critiques the existing economic growth pattern for its failure to generate inclusive and sustainable development.
    • Emphasis on the importance of inclusive economic growth and challenges posed by the mismatch between skills and jobs.

    Way Forward:

    • Policymakers need to reimagine India’s growth path with a focus on inclusive economic growth.
    • There are no shortcuts, and investments in the small-scale and informal manufacturing sector are crucial for sustainable development.
    • India should leverage its unmet needs to attract producers and make more for India in India, thereby growing jobs and incomes.

  • RBI reports reduced risk of Stagflation in India

    stagflation

    Central Idea

    • The Reserve Bank of India (RBI) officials have reported a decreased risk of stagflation in India, now estimated at 1%, down from 3% in August

    What is Stagflation?

    Details
    Definition   An economic condition characterized by stagnant growth, high unemployment, and high inflation.
    Indian context Fluctuating growth rates; periods of slowdown have raised concerns about stagnation.
    Inflation Dynamics in India Historically high at times, often driven by rising food and fuel prices.
    Supply Shocks Vulnerable to global oil price fluctuations and agricultural supply shocks (e.g., monsoon variability).
    Past Episodes Elevated stagflation risks were noted during the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic.

    Methodology for Assessing Stagflation

    • Two-Pronged Approach: RBI assessment utilized two methods: analyzing periods of low economic growth with high inflation, and employing ‘at-risk’ frameworks, namely “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), using quantile regression.
    • Determinants of Stagflation: Key factors identified include supply-side shocks, commodity price spikes, tighter financial conditions, and currency depreciation.

    Key Risk Factors for India

    • Financial Conditions and Rupee Depreciation: Financial conditions and the depreciation of the rupee against the U.S. dollar are significant risk factors for stagflation in India.
    • Empirical Evidence: The integrated IaR and GaR frameworks corroborate these findings, although the impact of crude oil prices on domestic fuel prices has limited predictive power for stagflation.
    • Global Concerns: Post-pandemic, higher commodity prices and the U.S. dollar’s appreciation raised global stagflation concerns.

    Back2Basics: Economic Conditions: Definitions and Concepts

    Explanation
    Depression A sustained, long-term downturn in economic activity.

    Characterized by significant decline in GDP, high unemployment, low spending, and reduced industrial output.
    Deflation A general fall in the price level of goods and services over some time, indicating negative inflation rates.
    Disinflation A decrease in the rate of inflation, i.e., a slowdown in the rate at which prices increase.

    Example: Inflation rate falling from 8% to 6%.
    Reflation Economic measures, such as increasing money supply or reducing taxes, aimed at stimulating the economy to reach its long-term growth trend after a downturn.
    Skewflation A situation where the price of some items rises significantly while others remain stable.

    Example: Seasonal rise in the price of onions while other prices are stable.

  • India’s Disinvestment Strategy amidst upcoming Elections

    Central Idea

    • India’s disinvestment process, primarily focusing on minority stake sales rather than full privatisation, is expected to fall short of its fiscal year 2024 target.
    • The government’s cautious approach, influenced by the upcoming general elections, has led to a slowdown in the privatisation of major public sector undertakings (PSUs).

    Disinvestment Performance and Targets

    • Past Achievements: Over the past decade, disinvestment has generated over ₹4.20 lakh crore, but the current fiscal year’s target appears challenging.
    • FY24 Target: The government set a disinvestment goal of ₹51,000 crore for FY24, a reduction from the previous year’s estimate.
    • Major PSUs on Hold: Plans for the privatisation of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), and CONCOR have been deferred.
    • Progress So Far: Approximately ₹10,049 crore, or 20% of the budgeted amount, has been raised through IPOs and OFS.
    • Pipeline Projects: Strategic sales of CPSEs like SCI, NMDC Steel Ltd, BEML, HLL Lifecare, and IDBI Bank are planned but face delays due to various procedural hurdles.

    Factors Influencing Disinvestment

    • Political Considerations: Strategic disinvestment decisions are being influenced by the upcoming elections, leading to a cautious approach.
    • Challenges in Strategic Sales: The sale process involves multiple stakeholders and complex procedures, making it a lengthy affair.
    • Public and Political Resistance: Certain sectors, particularly defence and shipping, face opposition to privatisation, causing delays and policy reassessments.
    • Economic Think Tank Views: Observers note a recent slowdown in PSU stake sales, attributed to regulatory processes, global economic volatility, and shifting government priorities.

    Historical Context and Government Policy

    • Post-2014 Strategy: Since 2014, the government has revived its disinvestment policy, focusing on stake sales and listing of PSEs on the stock market.
    • Union Budget 2023-24: The disinvestment target for FY24 is the lowest in seven years, with the government yet to meet the target for 2022-23.
    • Reasons for Disinvestment: The government undertakes disinvestment to reduce fiscal burdens, finance deficits, invest in development, and retire debt.
    • Types of Disinvestment: The process includes minority disinvestment, majority divestment, and complete privatisation, managed by the Department of Investment and Public Asset Management (DIPAM).

    Recent Disinvestment Performance

    • Meeting Targets: The government has met its disinvestment targets only twice since 2014.
    • Challenges in Execution: Strategic sales have been complicated by various factors, including market volatility and political opposition.

    Future of Disinvestment in 2023-24

    • No New Additions: The government plans to continue with the already announced privatisation of state-owned companies without adding new ones.
    • Challenges and Vision: Observers suggest that disinvestment should align with the government’s long-term vision for privatisation and sectoral presence, rather than being driven solely by revenue needs.

    Conclusion

    • Strategic Policy Shifts: The government’s disinvestment strategy is evolving, balancing between raising revenues and managing political and public sentiments.
    • Impact of Upcoming Elections: With general elections approaching, the focus on disinvestment might shift, impacting the progress and priorities of stake sales.

  • India’s jobs crisis, the macroeconomic reasons

    Burning Issue] Jobless growth in India - Civilsdaily

    Central idea 

    The article discusses the challenge of “jobless growth” in India, where the employment growth rate remains unresponsive despite increased GDP and value-added growth rates. It emphasizes the unique characteristics of India’s jobless growth regime, involving a high Kaldor-Verdoorn coefficient, and calls for a distinct policy focus on employment in addition to the traditional emphasis on GDP growth.

    Key Highlights:

    • The article discusses the distinction between wage employment and self-employment, emphasizing the challenge of inadequate labor demand, particularly for regular wage work in the formal sector.
    • India’s historical employment scenario includes open unemployment, high levels of informal employment, and a stagnant growth rate of salaried workers in the non-agricultural sector.
    • The lack of employment opportunities in the formal sector is attributed to factors such as output growth, labor productivity, and the introduction of labor-saving technologies.

    Key Challenges:

    • India faces the challenge of “jobless growth,” where the employment growth rate remains unresponsive despite a rise in GDP growth and value-added growth rates.
    • The article highlights the connection between labor productivity growth rate and output growth rate, contributing to the phenomenon of jobless growth in India.
    • The distinct form of jobless growth in India, characterized by a higher than average Kaldor-Verdoorn coefficient, poses a qualitative challenge for macroeconomic policies.

    Key Terms:

    • Kaldor-Verdoorn coefficient: A measure reflecting the responsiveness of labor productivity growth rate to output growth rate.
    • Dual economy structure: An economic structure characterized by the coexistence of a modern and traditional sector, often seen in developing countries.
    • Mahalanobis strategy: A development strategy that prioritizes heavy industrialization to overcome the constraints on output and employment.

    Key Phrases:

    • “Jobs generally refer to relatively better-paid regular wage or salaried employment.”
    • “The lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector.”
    • “The positive effect of output growth rate on employment fails to counteract the adverse effect of labor-saving technologies in the Indian jobless growth regime.”

    Key Quotes for value addition:

    • “The Indian economy has historically been characterized by the presence of both open unemployment as well as high levels of informal employment.”
    • “Jobless growth in India makes the macroeconomic policy challenge qualitatively different from other countries.”

    Key Examples and References:

    • Reference to the Mahalanobis strategy focusing on heavy industrialization as a policy for overcoming constraints on output and employment.
    • Mention of the higher than average Kaldor-Verdoorn coefficient in India’s non-agricultural sector as a distinctive feature of jobless growth.

    Key Facts:

    • India’s employment growth rate in the formal non-agricultural sector has remained unresponsive despite significant increases in GDP and value-added growth rates.
    • Jobless growth in India is associated with a high Kaldor-Verdoorn coefficient, indicating a strong connection between labor productivity growth rate and output growth rate.

    Critical Analysis:

    • The article critically examines the traditional presumption that increasing the output growth rate would be a sufficient condition for increasing the employment growth rate in the formal sector.
    • It highlights the need for a separate policy focus on employment, including both demand and supply side components, in addition to the focus on GDP growth.

    Way Forward:

    • Advocate for policies addressing the skills gap and improving the quality of the workforce to make automation less attractive for firms.
    • Propose direct public job creation as a demand-side component of employment policies.
    • Suggest reorienting the macroeconomic framework to finance employment-related expenditures, including increasing the direct tax to GDP ratio and improving compliance.

  • India’s Textile Crisis amid Rising MMF Fabric Imports

    Central Idea

    • Major textile hubs in India, including Ludhiana, Surat, and Erode, are grappling with the surge in imports of man-made fibre (MMF) fabrics, impacting a sector worth about $60 billion.
    • Fabric processors and weavers across these hubs express concerns over the influx of cheaper imports, primarily from China, affecting their businesses.

    Impact of Imported MMF Fabrics

    • Market Dominance: Imported fabrics, especially from China, are increasingly found in Indian markets, leading to unsold stocks and production cuts by local weavers.
    • Price Disparity: Indian weavers face competition from cheaper imported yarns, compelling them to import materials like viscose yarn from China to remain competitive.

    Statistical Overview of MMF Fabric Imports

    • Doubling of Imports: In the last three years, MMF fabric imports have doubled, with a significant portion being knitted synthetic fabrics.
    • Import Data: Daily imports from China increased from 325 tonnes in 2019-2020 to 887 tonnes in the April-June quarter of the current fiscal year, with a notable drop in average value per kg.

    Under-Invoicing and Quality Control Issues

    • Under-Invoicing Concerns: The practice of under-invoicing imported finished fabrics poses a major challenge, leading to calls for stricter customs regulations.
    • Quality Control Orders (QCOs): The government’s introduction of QCOs on MMF fibres and products, requiring BIS certification, has impacted the entire value chain.

    Consequences for Local Industry and Global Trade

    • Operational Capacity: The downstream industry is reportedly operating at only 70% capacity due to these challenges.
    • Export Decline: Exports of man-made yarn, fabrics, and made-ups have seen a year-on-year decline.
    • Global MMF Trade: India’s share in global MMF trade was 2.7% in 2019, with fabrics and yarn being major export components.

    Industry Perspectives and Government Policies

    • Innovation Gap: Industry experts highlight a lack of innovation in MMF products in India compared to countries like China, Thailand, and Korea.
    • Impact of QCOs: The introduction of QCOs, particularly at the fibre stage, is criticized for disrupting the industry, with calls for implementing quality controls at the garment stage instead.
    • Challenges for MSMEs: Small and medium enterprises face financial strain due to declining orders, high prices, and increased operational costs.
    • GST Issues and Financial Relief Demands
      • GST Refund Delays: The introduction of GST led to higher taxes on MMF fibre and yarn, with delayed refunds causing financial burdens for weavers.
      • Refund Controversy: Weavers contend that they are owed significant refunds due to the inverted duty structure, with the government potentially owing around ₹1,000 crore to the sector.

    Conclusion

    • Need for Strategic Measures: Addressing the challenges in India’s textile industry requires a balanced approach, considering both domestic capabilities and global market dynamics.
    • Government’s Role: Effective policy measures, including rationalizing import duties and quality controls, are essential to support the industry and enhance its competitiveness.
    • Future Outlook: The textile sector’s resilience and adaptability will be key in overcoming these challenges and capitalizing on potential opportunities in the global market.

  • [pib] RAMP Programme

    Central Idea

    • Union Minister for MSME launched three sub-schemes under the RAMP (Reforms and Acceleration in MSME Performance) programme.

    About RAMP Programme

    Details
    About World Bank assisted Central Sector Scheme.
    Launch FY 2022-23
    Supported By Ministry of Micro, Small and Medium Enterprises (MoMSME), Government of India.
    Primary Aim – Improve access to market and credit for MSMEs.

    – Strengthen institutions and governance.

    – Enhance Centre-State linkages and partnerships.

    – Address delayed payments and promote greening of MSMEs.
    Key Components – Preparation of Strategic Investment Plans (SIPs) by states/UTs.

    – Apex National MSME Council for monitoring and policy overview.

    Details of the Launched Schemes

    MSME Green Investment and Financing for Transformation Scheme (MSME GIFT Scheme) MSE Scheme for Promotion and Investment in Circular Economy (MSE SPICE Scheme) MSE Scheme on Online Dispute Resolution for Delayed Payments
    Objective To assist MSMEs in adopting green technology. The government’s first scheme to support circular economy projects in the MSME sector. Combines legal support with IT tools and Artificial Intelligence to address delayed payments issues.
    Support Mechanisms Offers interest subvention and credit guarantee support. Aims to achieve zero emissions by 2070 through credit subsidy. Focused on aiding Micro and Small Enterprises.
    Unique Features – Encourages eco-friendly practices in MSMEs.

    – Financial incentives for green technology adoption.

    		 – Promotes sustainable and eco-friendly business models.

    – Supports long-term environmental goals.

    		 – Innovative use of technology for dispute resolution.

    – Aims to streamline payment processes and reduce conflicts.

  • Call for Reform in Sovereign Credit Rating Process  

    Central Idea

    • India’s Chief Economic Adviser, V Anantha Nageswaran, emphasizes the need for reform in the sovereign credit rating process.
    • The aim is to accurately reflect the default risk of developing economies and reduce their funding costs.

    What are Sovereign Credit Ratings?

    • A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
    • It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
    • The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
    • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest possible investment grade, but with a stable outlook.

    India’s Pursuit of a Credit Rating Upgrade

    • Current Rating: India is at the lowest possible investment grade but is seeking an upgrade due to improved economic metrics post-pandemic.
    • Government Engagement: Continuous efforts are being made to engage with global credit rating agencies for an improved rating.

    Challenges in the Current Rating Methodology

    • Opacity and Impact: CEA points out the opaqueness in rating methodologies and the difficulty in quantifying the impact of qualitative factors.
    • Bandwagon Effects and Biases: The significant presence of qualitative factors leads to cognitive biases and concerns about the credibility of ratings.

    India’s Engagement with Rating Agencies

    • Meetings with Top Agencies: Finance ministry officials have met with representatives from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings.
    • Current Ratings: While S&P and Fitch rate India at BBB, Moody’s rates it at Baa3 with a stable outlook.

    Parameters and Issues in Sovereign Rating

    • Typical Parameters: Agencies consider factors like growth rate, inflation, government debt, and political stability.
    • Qualitative Component: Over half the ratings are determined by qualitative factors, often non-transparent and perception-based.
    • Dominance in Ratings: Institutional Quality, often measured by World Bank’s Worldwide Governance Indicators (WGIs), is a significant determinant for developing economies.
    • Issues with WGIs: These metrics are non-transparent, perception-based, and may not represent a sovereign’s willingness to pay.

    CEA’s Recommendations  

    • Need for Transparency: Sovereigns are expected to be transparent; similarly, rating agencies should make their processes clear and avoid untenable judgments.
    • Potential Benefits: Enhanced transparency could lead to more reliance on hard data and possible credit rating upgrades for many sovereigns.
    • Access to Private Capital: Improved ratings can help developing countries access private capital crucial for addressing global challenges like climate change.
    • India’s Export Targets: With initiatives like production-linked incentives and Make in India, India aims for a $2 trillion export target by 2030.

    Conclusion

    • Advocacy for Change: Nageswaran’s comments highlight the need for a more equitable and transparent sovereign credit rating process.
    • Broader Implications: Such reforms could not only benefit developing economies like India by reducing funding costs but also contribute to a more accurate and fair global financial system.