Standard & Poor’s has followed its peers in upping India’s credit rating to investment grade. Moody’s rewarded India with investment grade in 2004, followed by Fitch in 2006. The reasons for these upgrades lie in the country’s excellent economic prospects and a stable outlook on foreign debt amidst a weak, but improving fiscal debt regime.
Judging by the explanation for S&P’s upgrade and its timing, one could be forgiven for assuming its upgrade is more an endorsement of past performance than a benchmark for growth prospects. International credit rating agencies such as S&P’s are supposed to provide investors around the world with independent yardsticks to evaluate countries with perceived risks. But the history of capital flows to developing and transition economies suggests that more than the agencies’ stamps of approval, it is the level of confidence the local governments and businesses inspire that is critical. India’s dream run since 2002has much more to do with the sense of policy determination, and with clear-headed businessmen exploiting opportunities than the “speculative” rating grade would suggest.
A more substantive shortcoming of agencies such as S&P’s than the fact that the prognosis comes so late, is the glossing over of... Inflation...(which) threatens to rise even further. ...(I)t is surprising that S&P’s paid little attention to this..., focussing instead on the weak but improving fiscal health of the government. India may have become a high growth centre despite high public debt; it may continue to remain so if the burden of the public debt does not crowd out private investments. But the economy will decelerate if unchecked inflation undermines public incomes.