India’s Sovereign Credit Rating
Source : The Hindu
GS III : Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Why in News?

India’s Sovereign Credit Rating will remain unchanged at the current level of BBB- for the next two years despite the potential adverse impact of the surging pandemic on its economy.

• It was declared by S&P Global.

Key Facts

• The country would witness a slightly faster pace of growth in the next two years, effectively supporting the rating.
• The second wave would not have any major impact on the government’s fiscal position.
• There could be upside pressure on fiscal deficit as revenue generation could be weaker but the government’s debt stock would remain roughly stable at just above 90% of the GDP.

What is Credit Rating ?

• A credit rating is an assessment of the creditworthiness of a borrower with respect to a particular debt or financial obligation.
• A credit rating can be assigned to any entity that seeks to borrow money an individual, a corporation, a state or provincial authority, or a sovereign government.
• It shows the level of risk associated with lending to a particular country since it is applied to all bonds issued by the government.

Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as S&P Global, Moody’s, or Fitch Ratings.

Sovereign Credit Rating

• A sovereign credit rating is an assessment of a country’s creditworthiness introduced in the early 1900s.
• To evaluate countries rating a country shows that it is willing to make its financial information public to investors.
• For evaluation countries credit rating companies consider factors such as
  • The political environment
  • Economic status
  • Its creditworthiness to assign an appropriate credit rating
• To access funding for development projects in the international bond market.
• They will assign a rating stretching from AAA grade to grade D.
• Why is it Important ?
  • Countries with a good credit rating can attract foreign direct investments.
  • A country with high credit ratings can access funds easily from the international bond market.
  • Besides the lenders know when low sovereign credit rating means that a country faces a high risk of default.
• Sovereign credit risk depends the main factors such as
  • Debt service ratio
  • External debt
  • Import ratio
  • Economic development
  • Growth of domestic money supply
  • Per capita income
  • GDP growth
  • Rate of inflation
  • History of defaults

India’s Sovereign Credit Rating

• Zero sovereign default
  • India is a country with a zero sovereign default history over the last two decades.
  • India’s foreign exchange reserves as of 15 January 2021 were at $584.24 billion compared to its total external debt including that of the private sector at $556.2 billion.
  • Its reserves to debt ratio, which was at 78.4% in 2016-17 rose to 85% in 2019-2020, and appears to have further risen to 105% in 2021.
  • India has done reasonably well in terms of its external sector vulnerability, despite a pandemic.
• A credit rating of AAA is the highest, while BBB- the credit rating assigned to India.
  • It is the lowest among the investment grade bonds.
• Still why India have a low credit Rate ?
  • Government debt as a percentage of Gross Domestic Product (GDP) has been rising and is expected to reach 91% of GDP in FY 2021 from a level of 75% of GDP in FY 2020.
  • Debt is likely to stay at high levels of up to 90% for at least another two years as per estimates.
  • Fiscal Deficit and Revenue Deficit would pose issues of debt sustainability.

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