India’s credit rating anomaly: Why the country’s economic, fiscal performance merit an upgrade

The ability of a country to raise capital in the financial markets is linked to its perceived creditworthiness and is a critical but underexplored theme determining its economic and social prospects. Investors typically rely on credit ratings to determine a country’s credit worthiness. If a country’s credit rating is lower than its credit fundamentals, as we argue to be the case for India, it invariably leads to higher borrowing costs, leaving less fiscal space for public spending on areas such as health, education, infrastructure, and climate resilience.

Credit rating agencies rate countries on a scale from AAA (highest rating) to D (lowest rating). India’s credit rating has remained unchanged at BBB- since 2006 by Fitch and since 2007 by S&P. This is the lowest “investment grade rating” (see Tables 1 and 2) and is just one notch above “non-investment grade ratings,” which are considered speculative and carry much lower expectations of debt being repaid. The same is true for the rating by Moody’s, except for a brief three-year period between 2017-’20, when Moody’s raised India’s rating by one notch to the equivalent of BBB, before reverting to BBB-.

Given India’s recent economic performance, it seems rather unintuitive that India’s creditworthiness has remained unchanged for...

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