Behind India’s credit ratings
Two out of the three major rating agencies have now adopted a stable outlook on India’s sovereign ratings. Moody’s Investors Service changed its outlook from negative to stable on October 5. The rating is still at the lowest investment grade, only a notch above “junk”. The highest was in 1988 at A2, or four grades above than it is today. There were sharp declines around the foreign exchange crisis that led to liberalisation in the early 1990s (chart 1).
India had only enough reserves to cover three weeks of imports in December 1990. Import cover has now risen to 17.4 months as of the end of 2020-21 (chart 2). India also reported a current account surplus for the first time since 2003-04, exporting more goods and services than it imported during the year (chart 3).
But this was driven more by a fall in crude and gold imports rather than higher exports. Exports fell for the second year in a row in 2020-21 (chart 4).
Moody’s noted that India’s general government debt has increased from about 74 per cent of gross domestic product (GDP) in 2019 to 89 per cent in 2020. The fiscal deficit, or the difference between what the government earns and what it spends, went up to 9.36 per cent of GDP because of the pandemic (chart 5). However, the situation is likely to improve significantly this year.
The economic survey had talked about India’s rating relative to the size of its rank as the world’s fifth largest economy. But per capita income rather than the absolute size of the economy plays a role, with higher rated countries typically having higher per capita income (chart 6). Moody’s too talked about low per capita income as a key challenge.
Focus on economic growth, which will increase per capita income, may be the only way to higher ratings.