In today’s Finshots, we tell you why India has found it hard to get a thumbs up from global credit rating agencies.

Remember our story about the snowball effect in India? Corporate bigwigs, foreign investment firms, everyone thinks this will be India’s decade for growth.

Okay, not everyone’s on the same page. Because there’s one category of folks who haven’t been quite as effusive with their praises. We’re talking about credit rating agencies.

For the uninitiated, CRAs such as S&P Global, Moody’s, and the Fitch Group have one job — to decide whether a company will default on money it has borrowed. They assign probabilities to such events and rate the companies on a certain scale, usually through letters. Typically, AAA is the highest rating and D signals a default.

When a CRA is unwilling to change a rating but believes there’s more optimism on the financial front, it tweaks the outlook. Today, it could say that a company is stable. And tomorrow, it could turn negative on the company’s future. So in effect, they could stick with the same rating but simply change the outlook, in a bid to convey some change in sentiment.

And like companies, countries are also assigned credit ratings and an outlook.

Take India for instance. Moody’s has given the country a long-term rating of Baa3. If you want to be considered investment-worthy, well, that is the lowest acceptable rating you can carry in Moody’s books. It’s called an investment-grade rating. If you drop below that, you’ll be in junk territory. And yeah, no one wants to fall into that territory.


Well, the lower your rating, the higher your cost of borrowing. Think of it like your personal credit score — CIBIL. If you don’t have a top score, getting a loan is harder. Also, since you’re deemed relatively risky, lenders will charge you a higher interest rate. You lose. So, your borrowing cost could ultimately hinge on the opinion of these CRAs.

So where does India stand in all this?

Unfortunately, we’re at the bottom of the ladder. Fitch Ratings and Standard & Poor’s both rate us a BBB-. And Moody’s slots us in at Baa3. It can’t get any worse. If it does, well, we fall in junk status and that’s a pretty horrible place to be. Most investors have internal rules that prevent them from investing in countries in the junk territory. We’ll lose out on inflows.

Now you can imagine that India’s not happy about this. And apparently, the Chief Economic Advisor and the folks at the Finance Ministry met with Moody’s on Friday. They’re trying to convince the rating agency to change its mind. And their question seems to be, “How can Indonesia have a better rating than India?”

So, the question is — why aren’t these rating agencies giving us an upgrade?

Well, if you go by what The Economic Survey has to say, it’s a case of bias.

There is a large academic literature that highlights bias and subjectivity in sovereign credit ratings, especially against countries with lower ratings.

Now we don’t know how true that is.

But what we can tell you is that rating agencies have a few concerns. And Fitch laid some of it out last month when it stuck to its guns with the BBB- rating.

So, the folks at Fitch do believe that India has strong growth potential. They agree that we’re one of the fastest-growing economies in the world. But they’re worried that our debt levels are quite high and we’ve borrowed too much. Now when we borrow money we have to pay interest on it too. And 27% of our revenue goes towards meeting these obligations. On the other hand, the median ratio is just 7% median for other BBB rated peers.

And it’s putting pressure on our government finances. So our fiscal deficit situation — where we spend more than we earn from taxes — isn’t praiseworthy either.

For instance, because our tax coffers don’t fill up quickly, the government resorts to selling its stake in companies such as LIC. It’s called divestments. And it’s a nifty way to raise money. But it’s not really sustainable to keep doing this. At one point, we’ll run out of things to sell. Also, it’s quite dependent on how well the stock markets are doing. So, Fitch stripped this bit out and said that our deficit is at a whopping 9.2% of our GDP in FY23. For context, the median deficit for other BBB-rated countries is 3.6%.

So you can see why that would raise eyebrows at Fitch.

Also, they don’t quite believe the promises the governments make during the budget speeches. They want to see this translate into ground reality. Because we actually haven’t stuck to some of our earlier commitments. Such as with the Fiscal Responsibility and Budget Management (FRBM) Act which came about in 2004. The goal of the FRBM was to make sure both the central and state governments were mindful of their deficits. Try and keep it to 3% of the GDP.

And initially, it looked like we did. We hit the target before the FY09 target.

But…the government auditors raised a red flag. It said that the government under-reported the numbers. And we pushed certain liabilities for later. Just to make it seem like we’d achieved the target.

And since then, we’ve continually played around with the limits of FRBM. We’ve never quite hit the target. We said we’ll hit 3% by FY17 but since then we’ve just kept moving the goalpost citing poor revenue collection. And as things stand, we’ve ditched the 3% target. Instead, our eyes are on a new 4.5% target by FY26 now.

So yeah, you can see why Fitch believes that we don’t actually have a clear roadmap to achieve that. Their contention is that the only way India can get there is if we cut our expenditures.

But there’s a problem here. The GDP or the economy is driven by 3 things — consumer spending, government financing, and private company investments. And at the moment, private investments have been fairly lacklustre. So the government has no option but to keep spending in the hope that it can propel growth.

That could mean there’s not much headroom to cut our expenses. And Fitch will be quite aware of that.

Now we’re not saying that Fitch or the other rating agencies are right in their assessment. You could argue that they are particularly harsh with their evaluation when it comes to developing countries like India while giving countries like USA a pass even though they've been pretty reckless with their finances. But the unfortunate reality is that even if we do believe they’re wrong or that credit rating agencies are past their expiry date of usefulness, the world still relies on them.

And India knows this too.

We’re quite dependent on inflows from foreign investors — into building businesses and into the stock markets. These dollars help us build reserves for a rainy day. If we get a bump up in ratings, you could see truckloads of money coming in. And that could be a gamechanger.

That’s why we keep trying to sway their minds. We keep meeting them in their offices to have lengthy discussions. We even keep making noise in the media about being treated unfairly. But each time, our requests are denied.

Hopefully, this time will be different, Hopefully, Moody’s really listened to our arguments. And we’ll just have to wait and see which way the wind blows now.

Until then…

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