The Ministry of Finance will likely request a rating upgrade from the international rating agency Moody’s Investors Service. In June 2020, the agency downgraded the long-term ratings of Indian foreign currency and local currency issuers to Baa3 from Baa2, which is the lowest rating for a sovereign.
The reports suggest that government officials will provide details on how India will meet its fiscal targets for the current fiscal year. While downgrading India’s rating, Moody’s had raised political challenges in dealing with a protracted economic downturn and worsening fiscal position. The Indian government does not take out sovereign loans, so why is the Ministry of Finance eager to convince one of the best rating agencies in the world to revalue its sovereign loans?
There are 3 main reasons behind this development:
- The Indian government borrows heavily from the domestic market to finance its social sector programs like MNREGA, food subsidies and midday meals. It also issues domestic bonds to finance its infrastructure projects with a gestation period of 10 to 15 years. This is leading to the crowding out of the corporate sector, which is struggling to raise funds in the country. In the 2019-20 budget, the government first raised the possibility of seeking sovereign loans 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%, giving India the ability to meet its debt needs at very low interest rates from abroad.
- Besides the Indian government’s plans to borrow abroad, there is one more reason to ask for credit ratings improvement. Indian companies regularly seek funds from overseas and a poor sovereign rating from India can increase the cost of raising debt. This affects the ability of Indian companies to invest in Indian projects.
- Higher ratings also help foreign investors make decisions before investing in a country. A lower-rated country is likely to be less investor-friendly, as Moody’s and other rating agencies consider the strength of financial institutions and the fiscal health of an economy.
Why did Moody’s downgrade India’s ratings?
In its review of ratings in 2020, the agency highlighted the weak implementation of economic reforms since 2017. Other reasons that led to the downgrade include weak economic growth, high budget deficit and increasing tensions in the sector. the country’s financial institution.
India’s economic growth is on a downward trajectory even before the pandemic caused the economy to shrink in the first quarter of fiscal year 21. Lack of private sector investment in recent years has constrained the government to invest more to stimulate growth, resulting in a high budget deficit. Before receiving the downgrade from Moody’s. India’s budget deficit had climbed to 4.6% of GDP in 2019-2020, due to poor revenue realization. For the year 2020-2021, India’s budget deficit stood at 9.3% of GDP, lower than the 9.5% estimated by the Ministry of Finance in the revised budget estimates.
Can India get an upgrade?
International rating agencies do not follow government recommendations when deciding their ratings for sovereigns. However, an active effort on the part of the government will help Moody’s take an appeal based on the data provided by the government in the medium to long term. Lately, rating agencies have come under pressure due to the crisis in bond markets across the world where their credibility has been questioned as some of the failing companies received top ratings before defaulting on their debts.