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India's Sovereign Ratings- Challenges for Improvement in Ratings

 

- Brief overview of India's sovereign ratings:

 India's sovereign rating is a measure of the country's creditworthiness and ability to repay its debts. It is determined by various credit rating agencies based on factors such as economic growth, fiscal policies, political stability, and external debt. India's current sovereign rating stands at BBB- with a stable outlook from Standard & Poor's, Baa3 with a negative outlook from Moody's, and BBB- with a stable outlook from Fitch Ratings. Despite challenges such as high public debt to GDP ratio necessitated by Covid and widening fiscal deficit , India has been able to retain Investment Grade Ratings due to sustained improvements in public finances. (Fiscal deficit trend)


 - Sovereign rating is crucial as it reflects the creditworthiness of a country and its ability to repay its debts. It also affects the interest rates that a country has to pay on its borrowings, which in turn impacts its economic growth and development.

 -  Furthermore, sovereign ratings are used by investors to assess the risk of investing in a particular country. A lower rating can result in decreased foreign investment and a weaker currency, while a higher rating can attract more investment and strengthen the economy. Therefore, maintaining a good sovereign rating is essential for a country's financial stability and growth.

India's Sovereign Ratings: How it can be Improved

The strengths of the Indian economy lie in its fast-growing economy and strong external balance sheet. However, S&P Global Ratings has flagged weak fiscal performance and low GDP per capita as areas of concern.Fitch Ratings have also mentioned that headwinds due to inflation, high interest rates, global slowdown apart from internal factors like high debt and fiscal deficits will moderate India's growth in the next few years before rebounding to 6.7% by 2025.

S&P expects India's economy to grow by about 6% in 2023/24, with investments and consumer momentum helping growth prospects over the next few years. However, despite its strong economic growth, India's sovereign credit ratings do not fully capture its fundamentals. The Economic Survey has called for sovereign credit ratings methodology to be made more transparent, less subjective and better attuned to reflect an economy’s fundamentals.

One way to improve India's sovereign ratings would be to address the concerns raised by rating agencies such as weak fiscal performance and low GDP per capita. This could involve implementing policies aimed at reducing the fiscal deficit and increasing GDP per capita through measures such as increasing investment in human capital and infrastructure.This years'budget has increased Capital Expenditure to Rs10 lakh cr. in an unprecedented infra push which will have a multiplier effect throughout the economy and will also crowd in private investments.The new PLI scheme is also expected to add to these efforts in increasing manufacturing growth and generating job opportunities to the growing population. This can also give a fillip to the country's exports of manufactured products by taking advantage of China+1 strategy of many MNCs like Apple etc.

Another way to improve India's sovereign ratings would be for developing countries to come together to address the bias and subjectivity inherent in sovereign credit ratings methodology and bring in more transparency. India has already raised the issue of pro-cyclicality of credit ratings in G20.

In conclusion, improving India's sovereign ratings would involve addressing the concerns raised by rating agencies as well as working towards making the sovereign credit ratings methodology more transparent and objective.



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