India feels it deserves a better credit rating

Written by Himani Kaushik | Sunny Verma | New Delhi | Updated: Aug 10 2011, 10:38am hrs
Even as the US and countries in Europe stare at credit rating cuts, India could well turn out to be an outlier, with the government pressing rating agencies to secure an upgrade. India is ranked much below countries in the eye of the storm like Ireland, Italy and Spain, which have huge debt. Greece, which has been reduced to junk category by all three major raters, was until recently rated much above India.

Spain and Italy, the latest to benefit from the European Central Banks bond purchases, still enjoy high grade investment ratings of AA and A+, respectively, from S&P. India, however, is rated seven notches below at BBB- with a stable outlook by S&P.

This reflects lowest investment grade ratings for India, only one notch above the junk category.

The government and many bankers and rating analysts believe India being the second-fastest growing economy deserves much better. S&P and Fitch are expected to review their India ratings in November. An upgrade would lower the cost of overseas debt for Indian companies, and prompt global fund houses to allocate a larger portfolio towards the country.

Goldman Sachs upgraded India equities to market weight on Monday from underweight.

Fitch Ratings on Tuesday told FE that it was encouraged by Indias effort to contain fiscal deficit and inflation, but is unlikely to change its ratings in the short term. The finance ministry has asked all the financial sector regulators to look at measures on how to improve credit rating. These rating agencies do not take into account facts like the vast reserves of public sector units,a senior official said.

S&P sovereign analyst Takahira Ogawa said the agency could raise the ratings on India if the government continues to reduce the public sectors deficits materially. Government finances are the weakest aspect of Indias macro-economic profile, Moodys said in its credit report on India last week. India has committed to contain its fiscal deficit to 4.6% of the GDP in the current fiscal.

Our assessment of low government financial strength is based on the governments high debt ratios and fiscal deficits. Total government debt is over 300% of revenues, while interest payments account for almost a quarter of government revenues much higher than the mean for BAA peers, it said.

Yet, Indian economy has delivered 8% plus growth steadily over the past 6 years. The countrys forex reserves also stands at a healthy $319 billion, while its debt-to-GDP ratio is much lower than the PIGS (Portugal, Ireland, Greece, Spain) economies.

India is rated by six credit rating agencies including S&P, Moodys, DBRS, Fitch, JCRA, and Rating and Investment Information Inc. Finance ministry has also created a committee to find ways to improve the rating agencies view of India.