Interesting, the other day I was having a discussion with one of my frinds who also is a piano teacher. She was complaining to me about how some of her students have passed an exam for a particular grade, yet she believes they are unacceptable students because they cannot do things that other students in that grade can.
I explained to her that in my own teaching I stay away as much as possible from "grading" a students ability, but rather work with the student individually to help them improve on the many individual areas that need attention. To me being in a grade means that you have passed a certain landmark in your journey of learning, but you have not necessarily taken the same path as other students have to reach that land mark. Each student has their own path to a grade, they absorb some material quickly but yet other material needs time to mature in their minds before they completely understand them. This process is different with every person, and therefore should be taken on an individual basis.
The grading systems are good in that they let students know where on the path they are, just like street signs on roads. However, the grading sysem should not be abused as a defacto standard of rigidity that all students must accomplish in the path to becoming a well learned musician.