The business of rating is very subjective, especially when it comes to sovereigns. Fitch has retained the rating of India at BBB- but given a negative outlook compared to the other two agencies that think it is stable. Hence, Fitch’s view comes as a disappointment for sure.
India is probably going to be one of the best-performing economies in the world this year. This has been done without the government going in for excessive fiscal spending as the western nations have done. This factor has been appreciated by S&P and Moody’s. The way in which we have rebounded has been remarkable, with the government following a rather unique route since the pandemic began of ushering in some tough reforms in the last 18 months. It has been ably supported by the Reserve Bank of India (RBI).
Fitch’s main grievance appears to be on the side of public debt, which admittedly is high compared to the median of comparable countries. Ideally, credit rating agencies (CRA) need to give more weight to the underlying as well as the efforts being put to get things back on rail. The Union Budget has laid down the fiscal path for the centre and this is also being pursued by the states under the revised FRBM guidelines. The focus has been on galvanising investment as seen by the higher capex. There have been limited giveaways on the tax front and the government has taken the bold step on not compromising mulch on taxes on fuel. To top it all, the asset monetisation plan lays down the roadmap for revenue to be garnered and the sale of Air India bears testimony to the urgency on disinvestment. Hence, we do have reason to be disappointed in the view taken by the CRA.
Notwithstanding the view taken by these rating agencies, the relentless flow of foreign direct investment (FDI) is a vindication of reforms and how investors see India and its future. The government has ushered in reforms that have the potential to change the landscape in the medium term. The balance of payments has been positive as seen in the continuous growth of forex reserves with exports riding the wave of global trade.
Should we worry about the rating? From a practical standpoint this may not make a difference when companies borrow from overseas markets. But from the point of view of reputation, an economy like ours can expect a minimum rating of A given that all debt is in rupees and there is no external risk posed. Foreign investors are longing to come to India and take a share of the Gsec market. This is a problem emerging markets do face all the time and the discussion will be on.
Looking at how we are positioned for the future it can be said that both monetary and fiscal policies are working fine and the RBI has assured the market that liquidity will continue to be available for growth even though inflation is a worry. Structures are being created for addressing non-performing assets and financing infrastructure though a bad bank and new DFI. This should clearly be providing comfort to the rating agencies.
The government for sure will be continuing with the policy of talking to the rating agencies on reconsidering their approach to judging India and hence will be work in progress. It can be hoped that as the fiscal picture improves for sure in the coming years, an upgrade should be very much on the cards.
(Madan Sabnavis is chief economist at CARE Ratings. Views expressed here are his own.)