Can India expect a higher sovereign rating without reducing its fiscal deficit?
The debate on India's sovereign rating continues, with a chief economic once again expressing dissatisfaction over the ratings assigned by major credit agencies. Despite India's economic ascent from the twelfth to fifth largest globally within 15 years, it remains pegged at the lowest investment grade. In the Economic Survey of 2016-17, the then chief economic adviser (CEA) Arvind Subramanian first highlighted the "poor standards" of rating agencies.
He argued that India's ratings didn't reflect its economic fundamentals and prospects. The criticism was aimed at Standard & Poor’s which had ruled out any ratings upgrade for India for a considerable period, mainly on the grounds of the low per capita GDP and relatively high fiscal deficit. Subramanian’s survey argued that the methodology for arriving at ratings ought to go beyond these factors, as they don’t accurately capture whether India is at risk of credit default.
K.V. Subramanian, his successor, echoed these sentiments in the 2020-21 Economic Survey. India had been rated BBB-/Baa3, the lowest rung of investment grade by credit rating agency Moody’s in June 2020.
In its ratings scheme, Moody's ranks Aaa/Aa3 for countries that have the highest quality, A1/A3 for those with strong payment capacity. India is ranked in the lowest rung of the batch that is classified as those with adequate paying capacity. K.V.
Subramanian argued that since India has never defaulted, not even in 1991, and maintains comfortable foreign exchange reserves, there was a water-tight case for a ratings upgrade for India. Recently, CEA V. Anantha Nageswaran and his team, have in a publication titled “Re-examining Narratives: A Collection of Essays" highlighted India's stagnant rating over 15
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