Credit rating agencies (CRAs) opine that India’s high government debt and low per capita income constrain its sovereign rating. India’s purchasing power parity (PPP)-adjusted per capita GDP is 95 per cent of Philippines’. Moreover, India’s PPP-adjusted GDP per capita, both on a current and constant dollar basis, has grown at a significantly higher rate than those of Indonesia, Philippines, low-income, lower-middle-income, middle-income, upper-middle-income, and high-income countries, and the world for the 34-year period, 1990 to 2023. The compound annual growth rate (CAGR) of Philippines’ and India’s PPP-adjusted GDP per capita during 2014 to 2023 was 4.34 and 6.22 per cent, respectively. India’s PPP-adjusted per capita GDP will exceed that of Philippines in 2027, assuming both countries sustain the growth in this metric.
Credit ratings are a forward-looking assessment of a borrower’s probability of default. What is the justification for India’s sovereign rating being one to two notches lower than that of Philippines?
Here, a comparison with Singapore is particularly instructive.
Singapore and India
In June 2023, Singapore government published a document titled ‘Overview of Singapore Government Borrowings’ to address concerns about its high government-debt-to-GDP ratio. This paper stated ‘The Singapore Government has a strong balance sheet with no net debt. Singapore has assets that are well in excess of our debts. These net assets are our reserves, which are invested and yield financial returns.’ It explained that Singapore’s ‘AAA’ sovereign ratings assigned by the three CRAs — Fitch, Moody’s, and S&P — reflect, among other factors, the ample coverage income generating assets provide to debt.
Moody’s and S&P have assessed Singapore’s sovereign indebtedness to be significantly lower that its gross-government-debt-to-GDP of 171 per cent in 2023. S&P’s net-government-debt-to-GDP ratio of around minus 60 per cent in 2023 and 2024 is aligned with Singapore’s assessment of its indebtedness. Moody’s assesses Singapore’s government-debt-to-GDP ratio to be around 37 per cent in 2023 and 2024 (Table 1); the CRA excludes Special Singapore Government Securities (SSGS). The government issues SSGS, which is non-tradable debt, to just one entity — the Central Provident Fund (CPF) Board. The CPF Board mobilises the mandatory retirement savings of Singapore citizens and permanent residents and invests the same in multiple securities including SSGS. Moody’s treats SSGS as the Singapore government’s claims on itself.
Moody’s and S&P’s estimates are in line with the Government of India’s (GoI’s) reporting of sovereign indebtedness at over 80 per cent in 2023 and 2024. According to the ‘Report of the Comptroller and Auditor General of India on Compliance of the Fiscal Responsibility and Budget Management Act, 2003 for the year 2021-22’ published in 2024, GoI reports debt net of cash.
Rating methodology
One key difference between S&P’s and Moody’s sovereign rating methodologies is that ‘net indebtedness’ is one of the metrics the former uses to assign ratings, while the latter has adopted a different approach.
Moody’s sovereign rating methodology dated November 2022 states that ratings may be adjusted by up to six notches based on ‘the ratio of government financial assets including sovereign wealth funds to GDP’. Data published by Trendlyne indicates the market value of GoI’s stakes in listed public sector undertakings (PSUs) rose from 9.67 per cent of GDP in end-September 2023 to 11.73 per cent in end-December 2023 and further to 15.56 per cent in end-August 2024. The aforesaid methodology provides for a one-notch uplift if a country’s financial-assets-to-GDP ratio ranges from 10 to 25 per cent. Hence a one-notch uplift in India’s sovereign rating to Baa2 on the Moody’s rating scale, which is equal to ‘BBB’ assigned by Fitch and S&P, is warranted.
Sovereign net debt
S&P’s June 2024 rating report notes ‘The (Singapore) government’s extensive liquid assets consist of substantive holdings managed by GIC and Temasek Holdings (Private) Ltd (AAA/Stable/A-1+).’ Temasek Holdings is the holding company for Singapore’s PSUs and an institutional investor. GIC is a long-term global investor that manages foreign exchange (FX) reserves.
GoI has at least three categories of sizeable liquid, income generating financial assets — FX reserves, the market value of GoI’s stakes in listed public sector undertakings (PSUs), and the Employee Provident Fund Organisation’s (EPFO’s) non-government investments. These three investments are broadly aligned with S&P’s publicly available definition of a government’s liquid financial assets (see box at the bottom).
Included in S&P’s definition of a government’s liquid financial assets is, ‘general government external assets over 100 per cent of GDP…’. It is not known if India’s external assets exceed its GDP. But foreign currency (FC) denominated debt at current exchange rates is minimal at 3.15 per cent of total debt as of end-March 2024. India’s FX reserves, which are the fourth largest globally, have been more than six-times its FC-denominated debt since at least FY2018 and may be included in liquid financial assets.
Gross-government-debt-to-GDP ratio rose from 74 per cent in FY2018 to 93 per cent amidst Covid-19 in FY2021, and moderated to 86 per cent by FY2024. The aforementioned three assets more than doubled from ₹45.04 lakh crore or quadrillion as of end-March 2018 to ₹101.26 quadrillion as of end-March 2024. Hence, net government-debt-to-GDP ratio rose from 48 per cent in FY 2018 to 64 per cent in FY 2021, and moderated to an estimated 52 per cent by FY2024 ( Table 2).
A government-debt-to-GDP ratio ranging from 50 to 55 per cent is characteristic of countries rated ‘BBB+’, which is two notches higher than India’s ‘BBB-’ rating. India’s per capita income and fiscal deficit lag the metrics of ‘BBB’ rated peers (Table 3).
However, the large and diversified economy, robustly growing GDP per capita, low proportion of FC-denominated borrowings, sizeable FX reserves, and moderate net government debt, merit a sovereign rating higher than the current ‘BBB-’; probably a ‘BBB+’.
The way forward
That said, the three asset categories are an incomplete list of GoI’s financial investments.
According to the Statement of Outstanding Liabilities of Central Government, a component of the Budget documents, GoI owned ₹61.99 quadrillion assets as of end-March 2023. GoI does not report the composition of these assets.
India’s sovereign net debt must reflect the complete extent of GoI’s liquid, income generating financial assets and the market value of EPFO’s non-government investments and not the face value reported in its annual reports and reproduced in Table 2.
The ball is now in the court of the MoF to achieve the long overdue correction in India’s sovereign credit ratings.
The writer, the author of ‘Unfinished Business: Evolving Capitalism in the World Largest Economy’, is writing ‘The Rare Fortune: Investing, the Rakesh Jhunjhunwala Way’, which Westland Books will publish in 2025