By Soumya Kanti Ghosh
Coming on the eve of India’s 79th Independence Day, the sovereign rating upgrade by S&P, vindicating economic resilience and sustained fiscal consolidation, is a celebration of the very idea of India. For the record, the last time India was accorded a BBB sovereign rating was in 1990, the balance-of-payments crisis washing away the house of cards by March 1991.
Basis S&P, credit ratings are a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial programme (sovereign ratings are counted under the issuer categories).
In terms of rating, India has been often undershooting its true state of affairs in the eyes of major raters despite robust performance on all metrics, in particular on governance, stability, and technological prowess of late. This situation has often looked comical when the story is calibrated against comparable economies placed in a better rating cohort, many faring poorly on primary parameters—namely debt to GDP, fiscal prudence, growth dynamics, and capital markets vibrancy, not to speak of latent yet important traits such as innovation quotient, start-up economy, uplifting hundreds of millions from poverty, digital revolution that has made technology a public good, robust adoption of mass frictionless payment, and an instantaneous settlement architecture and stopping leakage through a full-proof direct benefit transfer system.
Why the timing matters
Timing is of utmost importance in the present upgrade. Given that a sovereign credit rating is an independent, forward-looking, unsolicited assessment of the creditworthiness of a sovereign entity, the latest upgrade along with a S&P Global Ratings statement rejecting the ill-conceived notion of proposed tariffs having a material impact on India’s growth story reinforces the growing Indianisation on the anvil that makes the desi narrative enticing while simultaneously looking outwards to credible and trustworthy trade and exchange partners sans uncertainty or volatility.
S&P has cited a stable outlook, widely reflecting expectations of continued policy stability and high infrastructure investments as twin engines to rev up India’s long-term growth propositions even as sound economic fundamentals are anticipated to support its momentum over the medium term. It is worth noting that S&P had already upgraded the outlook to positive in May 2024 even though it kept the sovereign rating of “BBB-”, citing robust economic growth as a driver then as well.
Interestingly, S&P has gone ahead accepting a growing middle class and its colossal purchasing power as one of the deciding factors to clinch the deal. This needs special mention as it aligns and reverberates with our domestic prowess led by a growing services sector expansion but upended by largely unnoticed micro, small, and medium enterprise and agri/allied formalisation that is changing things at the grassroots for good.
Implications for India Inc and investors
Since sovereign credit ratings have a direct bearing on global ratings of domestic corporates when they raise resources from overseas investors, it will improve the risk perception associated with the ability of marquee names in India Inc to borrow at a lower effective cost. Such a development should have a trickle-down effect on others, in particular the non-banking financial institution sector that has shown a marked preference for tapping overseas markets.
Another key factor is the mapping of domestic issuers that are assigned rating by global credit rating agencies vis-à-vis domestic ones, where the ratings are dissimilar despite the seeming sameness of scale by both. Basis CRISIL, while global scale ratings are assigned on an assessment of the issuer in relation to other issuers globally, domestic raters such as CRISIL benchmark the issuer against other domestic issuers. Hence, the logjam that may seep into pricing and risk conversion asymmetries. Higher rating and a better outlook solve this paradox to some extent.
Attracting foreign direct investment (FDI), besides cost-effective borrowings in external debt markets, serves as a motivation for many sovereigns as it boosts investor confidence in the ability of a country. It also extends to barrier-free return on investment/return on invested capital through profit repatriation or selling stakes via buyouts.
With global FDI (ex-flows through conduit economies) remaining non-buoyant in 2023 and 2024 but emerging markets and developing economies showing inflow growth in post-pandemic years reflecting a trend reversal vis-à-vis developed market counterparts, a rating upgrade now anchors our quest to attract a higher share of FDI, net of exogenous barriers.
With India likely to secure a favourable trade deal once the tantrums dissipate, the rating upgrade can be the lynchpin in our Aatmanirbhar Bharat quest, cementing India’s position in the renegotiated supply chain landscape.
A major area to watch out for is credit default swap markets that act as a barometer of investor faith in an economy’s strength and resilience. They invariably have a bearing on foreign investors’ psyche, along with spreads computed from bond prices.
S&P forecasts India’s real GDP growth at 6.5% this year, which is on the more pragmatic side when compared to other forecasts. S&P notes that US tariffs will have an overall marginal impact and not derail India’s long-term growth prospects. This is because, minus sectoral exemptions on pharmaceuticals and consumer electronics, the exposure of Indian exports subjected to tariffs is lower at 1.2% of GDP. The current account deficit is expected in the range 1.0-1.4% for 2025-2028. Consumer price index is expected in the range 4-4.5% till 2028.
Of course, the evolving environment warrants caution against major slippages in any significant head, in particular fiscal prudence. Thus, this could be a clarion call to revisit the playbook and plug the loopholes while formulating policy endeavours that reinvigorate our animal appetite with a Jai Hind attitude.
The writer is member, 16th Finance Commission, and group chief economic adviser, State Bank of India.
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