For too long have Western sovereign ratings agencies — Standard and Poor’s, Fitch and Moody’s — played a joke on India, the world’s fifth largest economy with fundamentals that would match or better the top-rated Western economies. On Wednesday, S&P revised its outlook on India from ‘stable’ to ‘positive’ after a decade, with a vague assurance that a ratings upgrade from BBB minus (bottom of investment grade) may follow suit in a couple of years. Fitch revised its outlook this January. This sort of assessment makes no sense, as the Finance Ministry has repeatedly argued; the parameters are dubious, and imbued with bias.
But first the near-term positives. S&P draws comfort from India’s growth and fiscal consolidation, with the GDP expected to grow 7 per cent annually over the next three years and general government fiscal deficit dipping from about 8 per cent of GDP this fiscal to 6.8 per cent in FY28. The Reserve Bank of India’s transfer of ₹2.1-lakh crore by way of dividend to the Centre adds to the positive fiscal outlook. S&P’s take on India could lift debt flows in particular, given the introduction of Indian government securities in the JP Morgan Government Bond Index for emerging markets. The bond inclusion — starting with a 1 per cent weight in June 2024 and going up to 10 per cent by March 2025 — is expected to attract dollar flows from global passive funds. A stable rupee outlook and S&P’s booster could spur active bond investors globally to reconsider allocations to Indian bonds.
The big picture, however, is important. In December 2023, the Finance Ministry published a telling paper on how ratings agencies are “opaque” in their methods; they are driven by subjective parameters, based on Worldwide Governance Indicators of the World Bank, rather than India’s fundamentals. A ratings agency should stick to assessing a nation’s ability to pay — which is borne out by its foreign reserves, its sovereign debt and total external debt to GDP, its growth rate, its current account balance and its capital flows. India’s foreign reserves exceed its total external debt, its currency is stable and its current account deficit to GDP is below that of A-rated countries such as the UK. Absurdly enough, its rating ruled below the so-called PIIGS economies (Portugal, Italy, Ireland, Greece and Spain) that went belly-up in the 2008 financial crisis. What ought to be a clincher for India is its impeccable repayment record.
The Economic Survey 2020-21 points out: “Never in the history of sovereign credit ratings has the fifth largest economy in the world been rated as the lowest rung of the investment grade (BBB-/Baa3).” Woolly notions regarding ‘political risk’ and ‘liquidity risk’ — shaped by the rating agencies’ tinted views on politics and banking — seem to play a big role here. Those who feel that the ratings game is meant to ramp up business for private creditors cannot be faulted. Emerging economies should carve out their own ratings ecosystem.