Why India has a poor credit rating despite being the fastest growing economy?

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Yash Vora

2/25/20242 min read

India has emerged as the fastest-growing economy. It is the 5th largest economy in the world in terms of GDP. The result of such extraordinary and fast growth on a global level is a better sovereign credit rating.

What is a sovereign credit rating?

A sovereign credit rating is an independent assessment of a country's creditworthiness i:e its ability to repay its debt, these assessments are done by global rating agencies.

This helps investors get an insight into the level of risk associated with investing in the debt of a particular country.

Hence a better credit rating equals a better ability to borrow funds via loans & bonds from domestic as well as international markets.

India is 5th largest economy in the world, one of the fastest-growing economies, and has never defaulted on its payments. Despite these factors, India's credit rating falls below countries like Peru, Philippines & Kazakhstan at BBB- (S&P and Fitch's) and Baa3 (Moody's).

These lower ratings affect India, where we have to pay the extra interest due to lower ratings, and FPI also gets affected.

Three rating agencies based out of the US are responsible for giving countries their credit ratings based on their pre-set criteria namely Fitch, S&P, and Moody's.

This isn’t some new thing for India. This downgrading of India's credit rating has been happening for the past 20 years.

But why did the rating agencies downgrade India?

If all numbers of India are showing growth then, how can these rating agencies rate India lower?

It is because of how these agencies rate a country. The ratings are calculated based on a set of criteria which are based on perspective.

That is they have some criteria (National income, Debt burden, etc) that are quantitative i.e. based on numbers, but most of the other criteria (political risk, banking sector risk, etc) are qualitative, i.e. based on how certain matters of that country are perceived.

For example, if Moody’s perceives a country has a high political risk, they would rate that country according to their perception, all these scores would result in downgrading or upgrading of the credit rating.

The Government of India has launched a formal protest against these ratings agencies citing that their rating criteria are opaque & unfair for developing countries.

These criteria are fit for the Western developed nations.

It especially focuses on how Fitch takes comfort from high levels of foreign ownership in the banking sector and assesses the public-owned banks to be disadvantageous, given their subjectivity to political interference. However, public-owned banks are pivotal to developing countries like India.

Do you think these rating agencies will change their assessment methods to cater to all kinds of countries and not just the West?

Thank you.

Regards,

Atharva Mahadik,

Kautilya, IBS Mumbai.



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