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S&P’s India Upgrade
Context: Last week marked a significant milestone for India’s economy when S&P Global Ratings upgraded India’s sovereign credit rating from BBB- to BBB—the first such upgrade in nearly two decades.
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- This move comes after years of government pushback against global rating agencies, which India accused of being biased against emerging economies.
- The upgrade reflects improving fiscal discipline, robust growth, and stable inflation, reinforcing India’s position as one of the fastest-growing major economies.
What is the Significance of S&P and Other Financial Institutions’ Ratings?
- Measure of Creditworthiness: Ratings by agencies like S&P, Moody’s, and Fitch assess a country’s ability to repay debt, influencing borrowing costs.
- Investor Confidence: Higher ratings attract foreign investment, as they signal lower risk for global investors.
- Borrowing Costs: Countries with better ratings can raise debt at lower interest rates, reducing fiscal strain.
- Macroeconomic Indicator: Ratings reflect economic stability, growth prospects, and policy credibility.
- Global Benchmark: Many institutional investors (e.g., pension funds) mandate minimum ratings for exposure to sovereign bonds.
What are the Major Concerns Associated with Ratings?
The Economic Survey 2020-21 criticised rating agencies for underestimating India’s economic strength, highlighting:
- Bias Against Emerging Economies: Agencies overemphasise per capita income, disadvantaging large, developing economies like India. China (A+) and India (BBB- before upgrade) had vastly different ratings despite comparable growth trajectories.
- Ignoring Domestic Strengths: India’s stable democracy, strong institutions, and forex reserves were not adequately factored in. Low external debt (unlike crisis-prone nations with similar ratings) was overlooked.
- Pro-Cyclical Downgrades: Agencies downgrade during crises (e.g., pandemic), worsening borrowing costs when economies need liquidity the most.
- Opaque Methodology: Lack of transparency in quantifying qualitative factors (e.g., political stability).
How Does the Recent Upgrade Help in Understanding a Better Picture of the Indian Economy?
- Fiscal Discipline Recognised: Fiscal deficit reduced from 9.2% (2020-21) to 4.4% (2025-26 target). Debt-to-GDP ratio set to decline from 57.1% (2024-25) to 49-51% by 2030-31.
- Growth Resilience: Despite global slowdown, India remains among the fastest-growing large economies (6.5% in 2024-25). Nominal GDP growth (critical for debt sustainability) remains strong.
- Inflation Stability: CPI inflation at 1.55% (July 2025)—lowest since 2017. RBI’s effective monetary policy praised by S&P.
- Future Implications: Lower borrowing costs for the government and corporates. More foreign capital inflows, boosting infrastructure and manufacturing. Potential for further upgrades if fiscal consolidation continues.
