In the grand chess game of the world economy, India is asserting its position as a key player with a new-found vigor, backed by the anticipation of an economic boom, lauded by many influential stakeholders, including multinational corporations and foreign investors. However, some critics aren’t as enthusiastic, notably credit rating agencies (CRAs), including heavyweights like S&P Global, Moody’s, and Fitch Group.
CRAs, the de facto credit score-keepers of the corporate and national world, rate the default risk associated with loans. India, unfortunately, teeters on the brink of the investment-worthy scale, with Moody’s scoring India at a Baa3 – just above the dreaded “junk” status. This placement has a tangible effect on India’s borrowing costs, much like how a poor CIBIL score affects an individual’s loan eligibility and interest rates.
India’s current ratings, assigned by Fitch Ratings and Standard & Poor’s (BBB-), are just about as low as they can go without slipping into the junk category. This precarious position means any further downgrade could deter investors with policies prohibiting them from engaging with countries in the junk category, thus losing India valuable foreign inflows.
The government isn’t taking this lying down, with the Chief Economic Advisor and the Finance Ministry actively engaging with Moody’s in attempts to advocate for a rating upgrade. They point to Indonesia, asking why it is deemed a safer bet than India.
So why are the credit agencies reluctant to provide a more optimistic outlook for India? The Economic Survey suggests bias against lower-rated countries, although this is subject to debate. Nonetheless, concerns raised by these agencies, such as Fitch, provide some insight.
While acknowledging India’s high growth potential, Fitch worries about its excessive debt levels, which have led to approximately 27% of India’s revenue being allocated for interest payments, significantly higher than the 7% median for BBB-rated peers. This financial pressure extends to India’s fiscal deficit situation, where expenditure consistently exceeds tax revenue.
The Indian government has resorted to divestments, selling stakes in companies like LIC to fill its coffers, but this tactic is unsustainable and largely dependent on the volatile stock market. Furthermore, Fitch states that India’s deficit stands at a staggering 9.2% of its GDP in FY23, more than double the median for BBB-rated countries.
Additionally, Fitch has voiced skepticism about the Indian government’s budget promises due to a history of unmet commitments, such as those related to the Fiscal Responsibility and Budget Management (FRBM) Act of 2004. Despite initial achievements, the FRBM’s objectives have been continuously pushed back and adjusted, casting doubt on India’s fiscal discipline.
To improve its credit rating, Fitch asserts India must reduce its expenditures. However, with an economy driven by consumer spending, government financing, and private company investments, this suggestion may be challenging to implement, particularly given the sluggish pace of private investments.
While some argue that CRAs are unduly harsh towards developing nations like India, their ratings carry significant weight. A boost in India’s credit ratings could result in substantial foreign inflows, driving the economy towards significant growth. India’s government is persistently pushing for a fair assessment, hoping this time its pleas won’t fall on deaf ears. The outcome of these discussions will not only influence India’s economy but will also be a test of the credibility of these CRAs in their evaluation of burgeoning economies
