Standard and Poor?s retains India’s rating: What does it mean?

By Ishita Misra

Appreciating the reform initiatives taken by the government in the past year, Moody’s rating agency upgraded India’s sovereign rating for the first time in 14 years. Following the upgrade, there were expectations that Standard and Poor’s (S&P) would also upgrade its sovereign ratings for India. However, the updated rating has led to disappointment as S&P has not upgraded the rating despite the numerous reforms that have taken place in the last few years.

How important are these sovereign ratings?

For most countries, the government expenditure tends to exceed the total revenue. Therefore, these governments borrow money to make up for the fiscal deficit by issuing bonds and treasury bills while promising to repay interest and principal at a later date. This is where global credit rating agencies come in. Rating agencies such as Moody’s and Standard and Poor’s assign ratings, called sovereign bond ratings, to countries on their ability to repay debt. For governments that depend heavily on borrowing money, sovereign ratings decide the cost of borrowing.

As governments tend to be the safest and largest borrowers in a country, the sovereign rating acts as the benchmark for any issuers of loans. In other words, sovereign rating upgrades or downgrades for a country can affect the borrowing costs for everyone in the country, including companies and individuals. Furthermore, the ratings by global agencies also act as a tool of encouragement for the government to pursue prudent monetary and fiscal policies.

Are rating agencies unfair towards India?

The Chief Economic Adviser, Arvind Subramanian, had slammed the rating agencies in May for not upgrading India’s rating despite clear improvements in economic fundamentals. He claimed that the improvement in economic factors such as inflation, growth, and current account performance coupled with the initiatives of demonetisation and implementation of the Goods and Services (GST) tax called for a rating upgrade by global rating agencies.

Without naming S&P, he had commented that rating agencies may have “poor standards“. He also went on to say that the agencies have been inconsistent in their treatment of China and India. This comment was made in light of the fact that the agency upgraded China’s rating even when it’s growth rate had fallen and its credit-to-GDP ratio was worse than India’s.

Moody’s report

After a gap of 13 years, Moody’s rating agency upgraded India’s credit ratings to from BAA3 to BAA2. The agency justified this move by quoting the initiatives taken by the government like demonetisation and GST that are likely to strengthen India’s credit powers, boost growth prospects and global competitiveness. Moreover, the reforms will lead to a gradual decline in the government debt burden over the medium term.

The report made by Moody’s also said that the recent reforms offer greater confidence that even in the event of economic shocks, India’s principal credit weakness, the high level of public indebtedness, will remain stable and ultimately decline. The report also added that the government’s efforts to reduce corruption, formalise economic activity and improve tax collection will contribute to the further strengthening of India’s institutions. The report went on to claim that the formation of a Monetary Policy Committee (MPC) and proactive use of the Bankruptcy and Insolvency Act 2016 to resolve the high NPAs has enhanced transparency and efficiency in the country while addressing one of the key weaknesses in India’s sovereign credit profile.

S&P’s response

In October, S&P said that India needs to improve its financial position in order to get a rating upgrade. According to S&P, India has one of the highest general government debt-to-GDP levels (68 percent) among sovereign emerging markets. Consequently, S&P kept its sovereign rating for India unchanged at ‘BBB-‘, while keeping its outlook for the nation stable.

It justified itself by saying that India’s sizable fiscal deficit, low per capita income and high government debt did not allow for better ratings. It further added that the fiscal gap was in line with the expectations. However, the global rating agency expects the Indian economy to grow rapidly over 2018-2020. The agency also has a favourable view of the reforms that the government has undertaken and praised India’s fiscal consolidation drive. Lastly, S&P said that the stable verdict awarded to India reflects the sound external account position and suggests that India’s GDP growth will remain strong over the next two to three years.

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