India’s Case for an Upward revision in the Sovereign Credit Rating
(Attributed to Vineet Mittal, Chairman of Avaada Group)
by Prashant Kapadia/NHN
India’s sovereign credit remains just a notch above the speculative grade. India has been at receiving end of such discrimination for more than two decades despite a strong and consistent financial performance over years. India’s sovereign credit rating, as of July 2023, is stable according to Standard and Poor’s (S&P) and Moody’s. It means that although S&P and Moody’s believes that India has a modest ability to meet its financial obligations, but there is also some associated risk and dilemma regarding it. This is even though India has never defaulted on its sovereign debt and has maintained considerable fiscal discipline even during global downturns.
It is believed that all the rating agencies use mix of parameters to measures economic strength, fiscal health of government, effectiveness of governance, institutional strength, political stability etc. However, objectivity in measuring these parameters as well as weightage assign to them is typically not available for scrutiny. It is widely believed that there is lack of transparency as well as perceived bias against developed countries in rating methodologies. The rating agencies must reflect on their approach to rating and evolve methodologies that are devoid of bias and that accurately reflect countries’ ability and willingness to meet their debt obligations.
Global Perspectives on India’s Economy
Since the pandemic, India has shown remarkable resilience emerging as the world’s fastest growing large economy with real GDP growth of 9.1% in FY22 and 7.2% in FY23 – of more than 7% in both FY22 and FY23. As per projections of RBI India’s GDP growth is again estimated to be ~7.5% in FY24. Appendix Figure 1 demonstrates how India’s economic growth stands out in the last three years as compared to other major regions/ economies globally.
The growth momentum is expected to continue as projected by global institutions like International Monetary Fund (IMF), World Bank etc. who have all recently raised their growth outlook estimates for the country. Reports from global financial institutions like Barclays, Morgan Stanley, Goldman Sachs have highlighted India’s potential to become the largest contributor to global growth by the end of this decade. According to their analysis, if India maintains its current growth trajectory, especially with a focus on increasing investment and harnessing its demographic dividend, it could consistently achieve an 8% growth rate without compromising its macroeconomic stability.
One such report released by Barclays’ titled “India: A Breakout Moment” in March 2024 discusses how India, with the right policy mix and reforms, could sustain higher growth rates. The study emphasizes India’s structural advantages such as high investment rates, favourable demographics, and a rising share in global exports, which are pivotal for maintaining its growth momentum.
Robust Economic IndicatorsIndia’s
FY2023-24 has been remarkable, with net direct tax collections increasing by 17.7% YoY to ₹19.58 lakh crore, and total gross GST collection reaching ₹20.18 lakh crore, an 11.7% increase YoY. Such figures not only exceed revised estimates but also demonstrate India’s enhanced fiscal management and economic stability.
The Indian banking sector is also significantly stronger, whether one looks at non-performing assets (NPAs), profits, growth in credit, or resilience to external shocks. As per recent report from another global firm – Nomura, bank balance sheets have greatly improved in last few years, with lower gross non-performing asset ratios (3.2% in 2023, down from 11.6% in 2018) and higher capital buffers (Refer Appendix Figure 2). This has been accompanied by the overall corporate debt to equity ratio falling from 1.16 in FY15 to 0.85 in FY23 (Refer Appendix Figure 3); indicating strong financial health of the economy.
Moreover, India’s foreign exchange reserves provide a robust buffer against external shocks, underscoring a strong balance of payments position. This is also reflected in the strong performance of Indian Rupee which has largely remain stable. In the last 18 months (since Oct-22), Indian Rupee has broadly remained stable against USD (Refer Appendix Figure 4) and outperformed against most emerging markets foreign exchange rates. Government has further committed to reduce fiscal deficit from 5.8% of GDP in FY24 to 5.1% in FY25 and to below 4.5% by FY26 (Refer Appendix Figure 5).
Other positive macro indicators include the industrial output (Index of Industrial Production or “IIP”) that has seen consistent growth across the key constituents (general, electricity, manufacturing, and mining); Manufacturing Purchasing managers’ index (“PMI”) that is showing steady improvement in manufacturing activities in the country and now stands at 59.1 as on March 2024 – a 16 year high ! Additionally, majority of the available high frequency indicators (domestic car sales, domestic air traffic, unified payments interface volume, electricity growth etc.) have recorded an improved performance.
Strong fundamentals for robust medium-term growth
Marked by confluence of strong economic fundamentals India is poised to remain among the highest growing economy in medium term. In the next few years, India’s economy is likely to surpass USD 5 Trillion to become the third largest globally. Building blocks are already in place including continued strength in domestic demand, rising working age population, structural reforms (digitalisation etc.) with policy continuity of central govt., higher infrastructure spending and private capex revival.I
ndia is emerging as global manufacturing hub and a credible alternative to China as various countries globally look to diversify their supply-chains. Government of India has also taken number of steps to promote the manufacturing sector like the introduction of Production Linked Incentive (“PLI”) schemes for various sectors to become ‘Atmanirbhar’, reforms for ease of doing business and attracting foreign investments (FDI).
As per Frost & Sullivan – while India’s per-capita income has been growing faster than global average, it still significantly lags the global average. India’s per capita income in CY2023 was USD 2,601 with global average nearly ~5x of the same; and this gap should close over time (Refer Appendix Figure 6). Demographics profile is highly favourable in the country with slower aging profile and increasing working age population (Refer Appendix Figure 7 and 8). This coupled with rising middle-class households and increasing urbanization, would drive higher productivity and growth in per capita income in the country.
Strength of Regulatory Framework and Institutions
Occurrence of catastrophic events that can impact country’s financial capability is another factor that is being believed to be used by agencies for determination sovereign ratings. India has developed strong institutional regulatory framework comprising of sectoral regulators like Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), backed by an independent judiciary which has time and again have proven their credibility to safeguard rule of law.
In comparison of developed world, India offers one of most transparent and trusted regulatory environments worldwide which is evident in form consistent increase in FDI which stood at US$ 71 bn in FY23. World Bank also acknowledged significant improvement in India’s business environment as evident from India’s ascent in ‘Ease of doing Business’ rank from 163rd in 2014 to 63rd in 2019.
Clear case for higher credit rating
In June 2020, Moody’s had downgraded India’s rating to ‘Baa3’ from ‘Baa2’ on account of slower growth and increasing deficit. Even though India has significantly improved on these and other key economic metrics (both on absolute basis and relative basis compared to other major economies), it continues to be rated as BBB-/ Baa3 by all the international rating agencies. As our government officials have also been highlighting, on both the key aspects for sovereign rating – ability to repay and willingness to repay, India deserves to be rated higher.
Even including private borrowing, India’s foreign debt/ GDP at ~18.5% is minuscule compared to many larger and better-rated countries (External Debt/GDP stands at ~95% for USA and ~300% for UK). A key aspect of India’s growth has been access to domestic financing routes including the banking industry etc. As an example, the domestic asset management industry is now seeing large inflows on account of household savings (which is one of the factors contributing to the strong performance of Indian stock markets). Similarly, there has been a strong inflow of international money of NRIs (Non-resident Indians). India’s forex reserves are already at record levels of US$ 640 bn, and all these factors significantly mitigate the risk of any default on external debt.
On willingness to repay – even at the time of the unprecedented BoP crisis in the 1990s, rather than defaulting on payment obligations, the Indian government pledged gold and built up on forex reserves. All these facts pose a serious question on the methodology adopted by international agencies and they should be more transparent in the parameters used in ratings methodology.
Role of Indian Rating Agencies
Considering these issues, Indian rating agencies such as CRISIL and CARE could play a crucial role in advocating for a fair assessment of India’s creditworthiness. By providing detailed, localized insights into India’s economy, they can help international rating agencies understand the nuanced dynamics of the Indian market.
India’s economic indicators, coupled with supportive analyses from leading global financial institutions, make a strong case for an upward revision of its sovereign credit rating. It is imperative for global rating agencies to recalibrate their methodologies to provide a fair and transparent assessment that truly reflects the resilience and potential of India’s economy. This would not only align with the economic data but also bolster investor confidence, further propelling India’s growth trajectory on the global stage.