The upgrade of India’s rating to BBB from BBB (-) by S&P is significant for two reasons. First: It was long overdue. On several forums, it has been argued that India deserves a higher rating given its consistent high level performance on all scores before and after the pandemic. Second: The timing is appropriate. It vindicates the view that India is one of the best performing large economies in the world. And this has been the story for the last three to four years.
S&P has evidently reposed faith in India’s performance over the years and believes that while the tariff saga needs to be watched closely, the overall story is more or less in place. The main areas of delight have been the following. First, India’s growth has been stable and the path for the year is well placed. S&P is talking of growth being around 6.8 per cent for the next three years which could look conservative as it is likely to cross 7 per cent during this time period. It buttresses the view that growth will be around 6.5 per cent this year too which is a big test given the tariff trauma. It has been stated that the tariff issue will not be a barrier to growth this year given that growth is propelled by the domestic economy.
Second, fiscal consolidation has been carried out quite aggressively. The fact that there was no large scale largesse during the pandemic has made it easier. More importantly, there has also been a lot of cleaning up which has been done through the delivery of subsidies. Further, the quality of expenditure has been improving with the focus on capex. The impact on infrastructure is visible. This has been done without straining fiscal balances.
Third, inflation has largely been under control which is important as it guarantees stability. Fourth, monetary policy has been streamlined and has effectively navigated the growth-inflation tradeoff. Fifth, the external sector has been an epitome of resilience as seen in the strong balance of payments and the buildup of forex reserves. Interestingly, S&P does not see much threat on the issue on oil imports. While there would some strain in terms of cost, this is something that can be absorbed easily.
The attractiveness of the Indian economy reflected in the FDI and FPI flows. Here decisions are based on hard research and the political and economic dynamics and future outlook are examined threadbare. India has historically been an attractive market among the emerging economies. The final pat came from the inclusion of Indian bonds in global indices such as JP Morgan, and Bloomberg. The upgrade should infuse more foreign flows as often fund houses have limits to trading in countries with differential ratings.
So what does this upgrade means for us?
To begin with, it comes after a relentless intellectual battle the government has waged with the rating agencies for quite some time now. While the one notch upgrade is not big as the outlook is still stable, there is scope for a change to positive before a further upgrade becomes due. Understandably, these ratings are sticky and decisions are taken after considerable deliberation and progress is tracked minutely before any change is made. Therefore, while an upgrade looks likely, it can take another two to three years.
Second, this is something which will always make other rating firms like Moody’s and Fitch reconsider their position on India. While each agency has its own distinct approach, there is a possibility that they would also have an upgrade on the rating table when the issue comes up.
Third, this one notch upgrade will sound well in the market. The Indian government does not borrow in international markets and hence is not affected directly in terms of its debt programme. However, several Indian companies which borrow in the global financial markets can draw a marginal advantage in terms of cost of borrowing. This is so as normally the sovereign rating becomes the base rating for all entities. And finally, considering the noise and controversy over the tariff issue, this does send a positive signal on the strength of the economy.
Going ahead, S&P does see scope for a further upgrade depending on how the fiscal consolidation process works out. One can be confident that this will continue as it has been shown in the last few years that the deficit as well as debt ratios have been the main focus of the government. A similar approach will have to be adopted by state governments as well too to support the overall effort.
The writer is Chief Economist, Bank of Baroda and author of Corporate Quirks: The darker side of the sun. Views are personal
