EDITORIAL 1: India’s S&P rating upgrade
Context
S&P Global Ratings had upgraded its rating on India to BBB from BBB-. The sovereign rating upgrade by S&P is significant for two key reasons. One, it came after a gap of nearly two decades; and two, it has meaningful implications for the Indian economy.
India’s upgrade pursuit
- The Indian government has over the last several years aggressively pursued the three global agencies — S&P, Moody’s, and Fitch Ratings — for higher ratings that, in its opinion, better reflect the economy’s fundamentals.
- In fact, New Delhi has repeatedly expressed its displeasure over the agencies’ methodologies, saying they were biased against emerging economies.
- So, what has convinced S&P that now is a good time for India to be given an upgrade?
Steady economic improvement
- The primary reason is clarity on the government’s finances. While the Centre has had a law called the Fiscal Responsibility and Budget Management Act since 2003 — it demands reducing the annual fiscal deficit to 3 per cent of GDP — it has rarely been met.
- Then there is growth. Despite GDP growth falling to a four-year low of 6.5 per cent in 2024-25, India remains one of the fastest growing large economies in the world — or in S&P’s words, “among the best performing economies in the world”.
- And this is real, or inflation-adjusted, growth; nominal growth — which is the actual increase in the GDP in today’s prices — is even higher.
- When it comes to calculating the debt-to-GDP ratio, it is the nominal GDP that matters. As such, as long as nominal GDP growth is higher than the pace with which the debt is increasing, the debt-to-GDP ratio will keep falling.
- Another key factor has been the fairly low and stable domestic inflation, with S&P praising the Reserve Bank of India’s inflation management record.
- As per latest data, India’s headline inflation rate had fallen to 1.55 per cent in July — the lowest since mid-2017.
- Low and stable inflation is crucial to foreign investors as sharp increases in prices can erode their investments, weaken growth and the domestic currency, and create social unrest — all factors that can lead to a rating downgrade.
Why credit ratings matter
- A credit rating is nothing more than a measure of an entity’s creditworthiness, or how likely it is that they may pay back borrowed money. If you pay back your loans and credit card bills on time and in full, your credit score improves. It is the same for countries.
- Most countries need to borrow money every year to fund some of their expenditures. The difference between the total income and the expenditure for a year is the fiscal deficit; the Indian government’s is Rs 15.69 lakh crore for 2025-26.
- This has to be met by borrowing money from the markets, with the government paying interest on it.
The rating scale
- To be sure, India’s rating level with S&P has itself not changed — the country remains in the BBB category. It’s just that it has gone from the lowest edge of it, or BBB-, to a more secure position. The next step would be BBB+.
- Ratings are divided into two rough classes: investment and speculative grades. Entities, including countries, in the former class are worth investing in, while repayment of loans taken by those in the latter is difficult to predict. But even within the investment grade, there are steps, and BBB is the lowest.
- According to S&P, a BBB rating indicates “adequate capacity to meet financial commitments, but more subject to adverse economic conditions”.
- The next step is A, then AA, and finally, AAA, which signifies “extremely strong capacity to meet financial commitments”.
Way forward
- The implications of a better credit rating are clear — the Indian government should be able to borrow at a lower rate of interest.
- This has already occurred, with government bond yields in the secondary market on August 14 falling as much as 10 basis points, with the rupee’s exchange rate also getting a boost.