Credit Ratings Need to be a Reflection of Changing Times

In these turbulent times of heightened geopolitical tensions, geo-economic fragmentation and oil price oscillations, India has acquired its place in the sun. It has emerged as a global growth driver, irrespective of the criterion adopted. This can be substantiated by the fact that at a time when global gross domestic product (GDP) growth is languishing at 3.2%, India is consistently achieving a GDP growth of 7% or even more.  

India contributes as much as 17% of incremental global growth. It is also the fifth largest global economy and its “productivity induced gains” (International Monetary Fund) has no parallel in recorded history. This list is merely illustrative and not exhaustive. For as John Donne, the English writer and Anglican cleric wrote about five centuries ago: 

“When thou hast done, thou hast not done, 

For I have more.” 

What is more important is that this is not a one-off episode but part of a process that is here to stay and consolidate. 

Against this macroeconomic canvas, global rating companies have received a lot of flak—and justifiably so—because of their ill-conceived stubbornness and an ostrich-like attitude of burying their heads in the sand and not upgrading India’s sovereign rating. This approach reminds me of the powerful words attributed to Lord JM Keynes: “When the facts change, I change my mind. What do you do, sir?” 

It is disconcerting that rating companies have not upgraded their ratings of India despite the altering ground realities and India’s compelling case for a sovereign rating upgrade. Thus the need for nurturing home-grown credit rating agencies for assigning sovereign ratings has become imperative. 

Emerging Contours 

A global south rating agency has enhanced two notches and given India a BBB+ rating. A deterministic factor in the sovereign rating process is the history of defaults and delinquencies. Given India’s track record of no defaults, ever, and the strength and resilience of the Indian economy, this rating upgrade is well-founded. 

It is remarkable alchemy that many developed countries that were rated much higher than India defaulted in their repayments but continued to enjoy the same rating without any downgrade. 

The World Economic Forum brought out those 147 countries that had defaulted on their debts since 1960. India, however, never had a solitary case of default. India’s growth is steady and robust, the current account deficit (CAD) is easily manageable, the currency is stable, inflation is well within the Monetary Policy Committee’s (MPC’s) defined threshold level and investment is on track. India is well-placed in terms of purchasing power parity (PPP) figures.  

While public finance metrics in terms of fiscal deficit, interest-to-revenue and debt ratios are still high, there has been a steady improvement in containing fiscal deficit from 5.9% in FY23 to 5.6% in FY24 and further to 5.1% in FY25, with a distinct likelihood of fiscal deficit dropping to 4.5% by FY26. Latest figures indicate that India’s fiscal deficit from April to August 2024 reduced to Rs 4.35 lakh crore and constituted 27% of the budgetary estimates and marked a welcome reduction from the previous year’s figure of 36%. In any case, a slightly unsatisfactory performance in one of the parameters should not obscure India’s remarkable performance in other defined parameters. 

Similarly, the MSCI Emerging Markets (EM) index shows India at second position, with China occupying the first. It is likely that with things proceeding along expected lines, India could move to the first position in the foreseeable future. India also officially became part of JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) for the first time recently. India, by March 2025, will join the ranks of China, Indonesia and Mexico, each with a maximum cap of 10% in the JP Morgan Global Bond Index-Emerging Market Global Diversified Index.  

Since these contextually significant developments reveal extensive faith in the Indian growth saga, macroeconomic and financial stability, as well as India’s emergence as a preferred destination for financial investments, foreign investors, particularly in the Eastern hemisphere (Japan, Hong Kong, Taiwan, etc.) should also be open to ratings by India’s domestic rating entities. Japan Credit Rating Agency (JCR) has affirmed India’s BBB+ Stable for over a decade now. With changing times and a redefined sovereign rating we are confident that the investor community would be proactive to augment their investments by accepting the revised sovereign rating.   

Where Do We Go from Here? 

Homegrown rating agencies have the wherewithal and the skill set for entering the domain of sovereign ratings by adopting a transparent and uniform approach. We argue for a non-closed-door approach, uniformity in process and transparency. In other words, the rating matrix must be fair and objective and the analysis and inference must flow from a data-driven and evidence-based approach.  

In sum, India has had a raw deal in sovereign ratings over the years. The sticky lowest investment grade for over fifteen years has not only been unjust but also uncharitable. It’s time for things to change—and change decisively.  

The writer is whole-time director, Infomerics Ratings. Views expressed are personal.