Recent U.S. credit downgrading by Standard & Poor's (S&P) of the U.S.'s credit worthiness from AAA to AA+ is ringing alarms almost everywhere, in every mind & heart in this World. China, E.U. & a handful of others seem very much tensed at this event. Other countries that have the AAA rating of S&P are Canada, Australia, Denmark, Guernsey, Hong Kong, Luxembourg and some more.
What is a credit rating?
To analyze its implications we first need to know, exactly what is Credit rating & what are its implications upon an Economy. Credit ratings, as defined by Investopedia means "An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities." Further, it says "Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default."
Who gives this rating to Countries/Economies?
Credit rating agencies give ratings to various countries. It gives ratings to the Bonds of various nations. These ratings, as per their scales, show how much worthiness or likelihood is there regarding a given countries repayment of debt. There are many such agencies in World giving ratings that are internationally accepted & relied upon. Standard and Poor's is one such well-known, respected & appreciated agency.
What is the usage/implication of such a rating?
The Investors around the world in form of FDIs, FIIs, Local investors, QFIs & especially Governments are searching for avenues to invest their money so as to gain profitable returns upon them. These entities rely upon the ratings given by such credit rating agencies to know how capable is the given country in returning the money borrowed.
Recent downgrade by S&P of the U.S. Economy/Bonds:
Even before S&P did so, a Chinese credit rating agency downgraded U.S. Bonds to 'A' from 'A+' suggesting a very critical situation of the U.S. & also put it on negative outlook. After the passage of the Bill in the U.S. Parliament which increased the debt limit again & proposed debt cuts, S&P reacted to it by downgrading the credit rating of U.S. Bonds to AA+ from the previous AAA. Thus, it signaled the Investors about its reduced trust on U.S.'s ability & Economic strength.
Mainstream reactions:
China reacted sharply, as is evident in its downgrading of the nation to 'A'. Investors, Stock Market traders & the Dow Jones reacted & have been reacting with sharply, E.U. also expressed its views but was intact that the Economy will regain it's rating back. Interviews of well-known Economists also made it clear that many countries have had such downgrading but regained with a stronger resilience, Eg. Japan.
The Indian reaction:
There was a lot of worrying & panic initially, but things became smoother later, though the Stock Market- BSE seems to be still worried over long-term implications of U.S.'s condition on Indian Economy. Here, we need to briefly look at what is U.S.'s major role in our Economy. U.S., as is debated heavily there, is our biggest IT sector Consumer. Most of our IT, BPO & ITes sector income is generated by U.S.- approximately 60% of revenues come from the American companies. In other Export-related sectors, India is only marginally dependent upon Export earnings, we are a Domestic Demand oriented Economy, i.e. majority of Economy's GDP & National Income is generated by Domestic/Local demand.
Implications on Indian Economy:
In short-term there are reasons to worry, especially for out BPO industry. Its revenues will be affected, mainstream reactions say. Recently, IT players expressed their concerns regarding occurrence of layoffs & Just-in-Time hiring very soon in the industry. Thus, there is a reason to worry though not a very grave one.
In the long-term, however, our Economy as a whole remains firm & intact, insulated from Global events as was evident during the 2007-08 crisis. Though majority of nations during the Recessionary phase were badly affected, India was growing at an average Growth rate of 6% per annum. All our sectors except the IT sector are Domestic Demand based hence very much insulated from such risk. Even the IT sector is strong & the players have started searching markets beyond the U.S. Current hotspots for our IT sector includes E.U., Africa & a few more destinations which weren't much explored before.
Conclusion:
Hence, being an Economy that is more dependent upon its own Consumers & being more Domestic Demand oriented, even in terms of Investments; India is much safer to such risks. Moreover, an Economy that smoothly sailed through the Recessionary phase while growing on an average 6%, is poised to grow larger & stronger despite such events in the International Economic system.
What is a credit rating?
To analyze its implications we first need to know, exactly what is Credit rating & what are its implications upon an Economy. Credit ratings, as defined by Investopedia means "An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities." Further, it says "Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default."
Who gives this rating to Countries/Economies?
Credit rating agencies give ratings to various countries. It gives ratings to the Bonds of various nations. These ratings, as per their scales, show how much worthiness or likelihood is there regarding a given countries repayment of debt. There are many such agencies in World giving ratings that are internationally accepted & relied upon. Standard and Poor's is one such well-known, respected & appreciated agency.
What is the usage/implication of such a rating?
The Investors around the world in form of FDIs, FIIs, Local investors, QFIs & especially Governments are searching for avenues to invest their money so as to gain profitable returns upon them. These entities rely upon the ratings given by such credit rating agencies to know how capable is the given country in returning the money borrowed.
Recent downgrade by S&P of the U.S. Economy/Bonds:
Even before S&P did so, a Chinese credit rating agency downgraded U.S. Bonds to 'A' from 'A+' suggesting a very critical situation of the U.S. & also put it on negative outlook. After the passage of the Bill in the U.S. Parliament which increased the debt limit again & proposed debt cuts, S&P reacted to it by downgrading the credit rating of U.S. Bonds to AA+ from the previous AAA. Thus, it signaled the Investors about its reduced trust on U.S.'s ability & Economic strength.
Mainstream reactions:
China reacted sharply, as is evident in its downgrading of the nation to 'A'. Investors, Stock Market traders & the Dow Jones reacted & have been reacting with sharply, E.U. also expressed its views but was intact that the Economy will regain it's rating back. Interviews of well-known Economists also made it clear that many countries have had such downgrading but regained with a stronger resilience, Eg. Japan.
The Indian reaction:
There was a lot of worrying & panic initially, but things became smoother later, though the Stock Market- BSE seems to be still worried over long-term implications of U.S.'s condition on Indian Economy. Here, we need to briefly look at what is U.S.'s major role in our Economy. U.S., as is debated heavily there, is our biggest IT sector Consumer. Most of our IT, BPO & ITes sector income is generated by U.S.- approximately 60% of revenues come from the American companies. In other Export-related sectors, India is only marginally dependent upon Export earnings, we are a Domestic Demand oriented Economy, i.e. majority of Economy's GDP & National Income is generated by Domestic/Local demand.
Implications on Indian Economy:
In short-term there are reasons to worry, especially for out BPO industry. Its revenues will be affected, mainstream reactions say. Recently, IT players expressed their concerns regarding occurrence of layoffs & Just-in-Time hiring very soon in the industry. Thus, there is a reason to worry though not a very grave one.
In the long-term, however, our Economy as a whole remains firm & intact, insulated from Global events as was evident during the 2007-08 crisis. Though majority of nations during the Recessionary phase were badly affected, India was growing at an average Growth rate of 6% per annum. All our sectors except the IT sector are Domestic Demand based hence very much insulated from such risk. Even the IT sector is strong & the players have started searching markets beyond the U.S. Current hotspots for our IT sector includes E.U., Africa & a few more destinations which weren't much explored before.
Conclusion:
Hence, being an Economy that is more dependent upon its own Consumers & being more Domestic Demand oriented, even in terms of Investments; India is much safer to such risks. Moreover, an Economy that smoothly sailed through the Recessionary phase while growing on an average 6%, is poised to grow larger & stronger despite such events in the International Economic system.
