US-based Fitch, one of the three major global rating agencies, the other two being Standard & Poor’s and Moody’s, has retained its low rating for India. The agency has given India a BBB-, just a notch above the junk grade, the lowest investment grade assigned to the country a decade ago.
Credit rating is an evaluation of the credit worthiness of a debtor (a business company) or a government predicting the debtor’s ability to pay the debt back. In other words, it forecasts implicitly the likelihood of the debtor’s default. Ratings are important as they help domestic companies raise overseas funds at competitive rates. For Indian firms, mobilising borrowings abroad is a much better proposition as external borrowings (EBs) are invariably cheap.
But to enable Indian companies to avail loans at much lower interest rates, the country’s sovereign rating should be strong and sound. At BBB-, it will be difficult for our companies to mop up loans in foreign markets. Since storming to power in 2014, the BJP-led government has unveiled measures to boost investment, cool inflation and bring down the fiscal and current account deficits. However, its policies have not been rewarded with a ratings upgrade from any of the big three global ratings agencies, who keep on saying more is needed.
It is a no-brainer that the government has been lobbying hard with these firms and pushed aggressively for a rating upgrade. But all its efforts have failed to impress them. The Fitch rating is the latest blow to its tall claims that India has robust economic parameters much better than what they used to be two years back.
The poor ratings are a strong indication that Prime Minister Narendra Modi’s economic stewardship, despite all his chest-thumping, has failed to get the endorsements from foreign rating firms. These firms have issues with India’s burgeoning debts and its poor banking system.
India has been one of the fastest growing major economies in the world over the past few years, but its rapid expansion has not rubbed off on the government’s revenue base. While India’s debt to GDP ratio has declined to 67 per cent from 80 per cent in 2004-05, interest payments take away nearly a fifth of the government revenues.
That Fitch has retained its poor take on India for 11 years in a row means that the incumbent government’s economic performance is no better than that of the UPA government. Fitch last upgraded India’s sovereign rating from BB+ to BBB- with stable outlook August 1, 2006.
Later, it changed the outlook to negative in 2012 and then again to stable in the following year even though it kept the rating unchanged at the lowest investment grade. It has termed the country’s fiscal position weak amid difficult business environment. As expected, the fresh rating has not gone down well with the government’s spin doctors.
The government has slammed the agency for following ‘inconsistent’ standards while rating India vis-à-vis China, saying it has not taken into account big strides that the government has made on reform measures such as GST, demonetisation, et al. The Fitch rating is in line with that of S&P’s.
The latter has also kept its sovereign rating for India unchanged at the lowest investment grade (BBB-) with a stable outlook. It has ruled out an upgrade till the end of this calendar year. In the absence of strong ratings by the three biggies, private foreign investments will continue to shy away from India.
