Wednesday, 09 Oct, 2024
Source: Getty
India’s impressive decade of growth has propelled it to the world’s fifth-largest economy, adeptly managing both the Covid-19 pandemic and geopolitical upheaval. Despite this, its sovereign credit ratings from Moody’s, Fitch, and S&P remain firmly at BBB-/Baa3.
Global rating agencies Moody’s and Fitch have offered a cautiously optimistic perspective on India’s economic outlook. Fitch has affirmed India’s sovereign credit rating at ‘BBB-’ with a stable outlook. Meanwhile, Moody’s Ratings has revised its growth projections for 2024 and 2025 upward, indicating a positive economic trajectory.
Notably, Moody’s has revised its forecast for India's GDP (gross domestic product) growth in 2024, raising it by 0.4 percentage points to 7.2 per cent, citing signs of a revival in rural demand. These forecast revisions hinge on expectations of robust, widespread growth, with the agency noting that projections could be raised further if cyclical momentum—particularly in private consumption—picks up
Meanwhile, Fitch Ratings maintained the country's long-term foreign-currency issuer rating at ‘BBB-’ with a stable outlook. However, Fitch raised concerns over fiscal metrics, governance issues, and GDP per capita trends, identifying these as ongoing credit weaknesses for the country.
In June, Moody’s cautioned that the slim majority of the BJP-led National Democratic Alliance (NDA) in the Lok Sabha could potentially delay more comprehensive economic and fiscal reforms. This, in turn, might hinder progress on fiscal consolidation efforts.
Fitch Ratings, in a separate assessment, highlighted that while India's robust medium-term growth outlook and progress in meeting deficit targets have enhanced the prospects of a modest decline in government debt, fiscal metrics remain a credit weakness. The report pointed out that "deficits, debt, and debt service burden" are all elevated compared to other nations with a ‘BBB-’ rating.
The agency also noted that "lagging structural metrics," such as governance indicators and GDP per capita, continue to exert downward pressure on the country’s rating.
Fitch in June raised its growth forecast for India’s current fiscal year to 7.2 per cent, up from the 7 per cent it had projected in March. The upgrade reflects a resurgence in consumer spending and a boost in investment.
The key question remains: Despite India's economic progress and its status as the world's fastest-growing major economy, are global rating agencies providing fair assessments, or is there a potential bias against India in their evaluations?
India's decade-long growth surge has catapulted it to the world’s fifth-largest economy, resilient through the Covid-19 pandemic and geopolitical tensions. Yet, the nation’s sovereign credit ratings from Moody's, Fitch, and S&P linger at a modest BBB-/Baa3. The 2021 Economic Survey criticised these agencies for alleged biases against emerging markets like India. A 2023 report from the Office of the Chief Economic Advisor echoed these concerns, arguing that the subjective nature of credit rating methodologies, shaped by a small circle of experts, may not accurately capture India's economic ascent. This opacity raises questions about potential biases against the Global South, including India. However, with the majority of its public debt in domestic currency and a spotless default record, India’s risk profile remains low.
Ratings agencies evaluate the creditworthiness of equities, debt, or countries, helping investors make informed decisions about investments. Their reports assess financial stability and default risk, guiding investors on the potential return on their investment.
Agencies periodically re-evaluate ratings based on new developments, such as economic changes, geopolitical events, or significant announcements.
Some argue that India's high inflation and debt burden contribute to its low credit rating. However, the authorities have actively worked to manage inflation, which stood at 3.54 per cent (based on all India CPI) as of July 2024, and to address the debt burden. India's forex reserves hit an all-time high of $681 billion as of August 23, marking a significant increase of $7.02 billion, according to data released by the Reserve Bank of India on August 30. The country’s banking system remains well-capitalised and resilient in terms of liquidity and asset quality. Additionally, India continues to attract substantial foreign direct investment, reflecting robust growth and strong confidence from international investors. Given these positive indicators, the credit rating for India appears to misalign with its economic fundamentals.
V Anantha Nageswaran, the government's chief economic adviser, stated in December that credit rating agencies need to reform their sovereign rating processes to accurately reflect the default risk of developing economies. This reform could save billions in funding costs. His remarks were in line with New Delhi’s current efforts to secure an upgrade to its sovereign credit rating, which remains at the lowest possible investment grade.
Even though India's economy has improved a lot, rating agencies haven't upgraded its outlook mainly because they're worried about the country's high deficits, debt levels, and debt servicing costs compared to other countries with a 'BBB' rating. They point out that even if the central government meets its fiscal deficit target for FY25, the overall deficit (including state deficits and not counting revenue from selling assets) would still be 8 per cent of GDP. This is much higher than the 3.2 per cent median for countries with a 'BBB' rating. Additionally, even though India covers most of its debt domestically, its interest payments take up about 25 per cent of its revenue, which is much higher than the 9 per cent median for BBB-rated countries.
Fitch Ratings suggests that India's credit rating could be upgraded if the country consistently improves its fiscal health and shows solid, ongoing private investment. These strides would strengthen confidence in India's ability to sustain strong medium-term growth.
