Mint Primer | Sovereign rating: How India can go from B to A

Fitch Ratings has rated India as “BBB-” with a stable outlook.  (REUTERS)
Fitch Ratings has rated India as “BBB-” with a stable outlook. (REUTERS)

Summary

  • Despite a sustained fiscal discipline record and narrower fiscal deficit, international rating agencies such as Moody’s and Fitch are hesitant when it comes to upgrading India’s sovereign rating. Why is it so? What more should India do? Mint looks at the whole issue closely.

What is India’s current sovereign rating?

Fitch Ratings has rated India as “BBB-" with a stable outlook. This means India’s credit quality is good and the chances of a default are low; however, adverse business or economic condition can impair this quality. BBB- is also the lowest investment grade rating. Other ratings agencies such as Moody’s and S&P have ranked India at “Baa3" and “BBB-" respectively—similar level as Fitch. By comparison, China has an “A+" rating, which indicates high credit quality and low risk of default. The US, in its turn, has an “AA+" rating, which implies that country has very high credit quality and a very low default risk (see chart).

How has India performed?

The Union government has been pretty single-minded in its fiscal consolidation efforts. It has improved the quality of spending by substantially increasing the share of capital expenditure. By better targeting subsidies and cutting back on wasteful spending, it has reined in the revenue expenditure sharply. By doing this, and through better revenue mobilization, it has almost halved its fiscal deficit from 9.2% of gross domestic product (GDP) in FY21 to 4.8% in FY25. It will drop further to 4.4% in FY26. It is also committed to reducing central government debt from 57.1% in FY25 to 50% levels by FY31.

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Why is a rating upgrade important?

It can help accelerate India’s economic growth. A better rating means a lower risk of default, and this translates into a lower cost of borrowing. As mentioned earlier, India is currently at the lowest investment grade level. An upgrade will make it more attractive for investments, which is key to fuelling growth. A higher rating boosts the overall credibility of an economy.

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What are rating agencies saying?

Fitch and Moody’s, while praising the government’s fiscal discipline and success in lowering fiscal deficit, said a lot more needs to be done for an upgrade. They want to see a big cut in overall government debt, which in India’s case is well above 80% of GDP. Fitch says it is just 50% levels for similar-rated peer countries. They also want the government to reduce its interest burden, which, at 25% of revenue, is way higher than the 8% median among other BBB-rated countries. They also seek more revenue mobilization measures.

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Are rating agencies just ‘biased’?

Many, including UN Trade and Development, have raised this doubt when it comes to how international rating agencies rate emerging economies. Some cite India’s case. For two decades now, India’s sovereign rating has stayed put. In this period, India‘s economy grew to become the fifth largest in the world. It is the fastest growing large economy with comfortable foreign exchange reserves, and a robust financial system. It is the darling of foreign investors. Yet its sovereign rating has been cast in stone for long.

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