The Ministry of Finance is likely to seek a ratings upgrade from international ratings agency, Moody’s Investors Service. In June 2020, the agency had downgraded India’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2, which is the lowest grade for a sovereign.
Reports suggest that government officials will provide details on how India will meet its fiscal targets for the ongoing financial year. While cutting India’s rating, Moody’s had cited policy challenges in addressing a prolonged economic slowdown and its deteriorating fiscal position. The Indian government does not undertake sovereign borrowings, so why is the ministry of finance eager to convince one of the top ratings agencies of the world to upgrade its sovereign borrowings?
There are 3 key reasons behind this development:
- The Indian government borrows heavily from the domestic market to fund its social sector schemes like MNREGA, food subsidy and mid-day meals. It also issues domestic bonds to fund its infrastructure projects with a gestation period of 10-15 years. This leads to the crowding out of the corporate sector, which finds it difficult to raise money within the country. In the budget of 2019-20, the government had first discussed the possibility of looking for sovereign borrowings to reduce the cost of debt for the government. India’s sovereign external debt to gross domestic product (GDP) is pegged at less than 5 per cent, giving India space to meet its debt requirements at very low-interest rates from abroad.
- Apart from that government of India’s plans to borrow abroad, there’s one more reason to seek a ratings upgrade. Indian companies regularly seek funds abroad and a bad sovereign rating for India may increase their cost of raising debt. It affects Indian companies’ ability to invest in the Indian projects.
- Higher ratings also help foreign investors make decisions before investing in a country. A country with lower ratings is likely to be less investor-friendly as Moody’s and other ratings agencies take into account the strength of financial institutions and the fiscal health of an economy.
Why did Moody's downgrade India’s ratings?
In its ratings review in 2020, the agency has pointed out weak implementation of economic reforms since 2017. Other reasons that led to the downgrade included low economic growth, high fiscal deficit and increasing stress in the country’s financial sector.
India’s economic growth has been on a downward journey even before the pandemic led to degrowth in the economy in the first quarter of FY21. Lack of investment from the private sector over the last many years has forced the government to commit higher investments to push growth, leading to high fiscal deficit. Before receiving the downgrade from Moody’s. India's fiscal deficit had soared to 4.6 per cent of the GDP in 2019-20, due to poor revenue realisation. For the year 2020-21, the fiscal deficit for India stood at 9.3 per cent of GDP), lower than the 9.5 per cent estimated by the finance ministry in the revised Budget estimates.
Can India get an upgrade?
International ratings agencies do not go by government recommendations while deciding their ratings for sovereigns. However, an active effort on behalf of the government will help Moody’s take a call on the basis of data provided by the government in the medium to long term. Of late ratings agencies have been under pressure due to the bond market crisis across the world, where their credibility has been questioned as some of the defaulter companies received top grades before they failed to service their debt repayments.