Lost and found: An ‘A’ for India’s long game

Why in the News

The Japan Credit Rating Agency has upgraded India’s long-term sovereign rating from BBB+ to A-, and raised the country ceiling to A. The upgrade is unsolicited, meaning the agency issued it without India commissioning or negotiating it. India last held an A-grade in January 1988, when Moody’s assigned it an A2 rating. That grade was lost when the borrowing fuelled growth of the 1980s ended in the balance of payments crisis of 1991. The contested question is whether a single external verdict marks a structural shift, since three of the largest agencies still hold India below the A band.

What is a sovereign credit rating?

1. What it measures: A sovereign credit rating is an independent assessment of a country’s creditworthiness, expressed as a letter grade standing for a probability of default.
2. The scale: Grades run from AAA down to junk, with BB+ and below classified as non-investment grade.
3. What agencies assess: The inputs are institutional strength and governance, economic structure and growth, external accounts and reserve adequacy, the fiscal position and debt path, and monetary flexibility.
4. Why it moves money: Ratings are embedded in bank capital rules under Basel III (the global bank capital standard), so an upgrade lowers the risk weight banks must carry against government debt. Lower risk weights raise demand for sovereign bonds and cheapen funding.

How did India lose the A-grade, and why did the return take 36 years?

1. The 1980s growth was borrowed: The central government’s fiscal deficit reached 9.1 per cent of GDP and the current account deficit rose to 3.1 per cent of GDP in FY 1989-90.
2. Political churn delayed the correction: Three prime ministers in as many years pushed reform out of reach, and no prospect of fiscal rectitude was in sight.
3. The external shock arrived on top: The First Gulf War and rising oil prices produced the balance of payments crisis.
4. The downgrade came in two steps: India was cut to Baa1 by October 1990. By mid-1991 reserves barely covered a few weeks of imports and the rating fell to non-investment grade.
5. Recovery did not restore the grade: Credible progress across successive governments followed, and thirty-six years passed before an A-grade was accepted again.

What did the Japan Credit Rating Agency actually cite?

1. Growth and its composition: The agency cited a high growth rate of around 7 per cent, supported by robust private consumption and public investment.
2. Tax action as a support: It named personal income-tax cuts and reductions of Goods and Services Tax rates, with the economy growing 7.7 per cent in real GDP terms.
3. Bank balance sheets: It cited the banking sector’s gross non-performing loan ratio declining to 1.8 per cent, supported by the Insolvency and Bankruptcy Code and capital injections by the government.
4. The character of the list: Almost every item cited is structural rather than cyclical, which is what separates a rating upgrade from a reaction to a good quarter.

Does the new GDP series survive scrutiny?

1. The quarter behind the upgrade: First quarter estimates for 2026-27 recorded real GDP growth of 7.8 per cent, nominal growth of 10.3 per cent, real Gross Value Added growth of 8.2 per cent, and gross fixed capital formation growing 11.9 per cent.
2. Revision is routine, not novel: India has revised its national accounts series in 1948-49, 1960-61, 1970-71, 1980-81, 1993-94, 1999-2000, 2004-05, 2011-12 and 2022-23.
3. What the revision fixed: The old series carried an outdated base year and relied on wholesale rather than producer prices, both flagged in International Monetary Fund assessments. The new series introduces an Output Producer Price Index, adopts double deflation across sectors including manufacturing, and aligns India closer to the System of National Accounts (SNA) 2008 (the international standard for compiling national accounts).
4. The official position on the charge of inflation: The Ministry of Statistics and Programme Implementation has stated that the revisions do not represent a downward revision made to make the current year’s growth appear higher, and that the improved implicit deflator now carries more than 300 individual price deflators.

Why is the upgrade significant beyond the letter grade?

1. It is an external verdict: An unsolicited upgrade is delivered rather than negotiated, so it cannot be presented as the product of official persuasion.
2. It validates pooled sovereignty: The rating rests on institutions built through Centre-State consensus, the GST Council foremost among them, whose pooling of taxation powers has no true parallel elsewhere.
3. It should reprice risk in boardrooms: A lower risk premium enters the calculations where foreign direct investment decisions are actually taken, which augurs well for inward capital flows.

Where the rating methodology itself is contested

1. The framework carries judgement, not only data: The assessment model is opaque at the point where committee judgement enters, and the resulting grade cannot be replicated from published inputs.
2. Fast growing emerging markets are penalised: The predilections built into the process have downgraded economies carrying low external debt and sound macroeconomic frameworks.
3. The divide runs along territorial lines: A duality of standards based on where economic activity is located separates advanced economies from the Global South in the outcomes.
4. Even AAA borrowers organise around the grade: The World Bank and several sovereign governments manage their balance sheets around retaining a rating, which shows how much the letter governs behaviour.

Where do the other agencies stand?

1. Three still hold India below the A band: S&P Global rates India BBB, Moody’s Baa3 and Fitch BBB-.
2. The upgrade works as pressure: Agencies are wary of being conspicuous outliers, so one move raises the cost of holding a divergent view.
3. Six firms set the price of capital: S&P Global, Moody’s, Fitch, the Japan Credit Rating Agency, R&I of Japan and Morningstar DBRS dominate sovereign assessment, in an industry dating to 1909 when John Moody began grading American railroad bonds.

Challenges to the A- upgrade

1. A single agency’s move does not reset the cost of borrowing: Investor mandates and bank capital rules key off the larger agencies, so funding costs shift only when the others follow. Eg. Indian issuers still price external debt against grades set one to three notches lower.
   The Fix: Publish a point by point rebuttal of each agency’s stated assessment, so a divergent grade has to be defended on the record.
2. External shocks sit outside the rating’s control: A grade earned on structural reform can be tested by a price the economy does not set. Eg. Tariff frictions, tensions in West Asia and elevated oil prices ran alongside this upgrade.
   The Fix: Hold the reserve buffer and the fiscal glide path independently of the rating cycle, so the grade is not defended by procyclical tightening.
3. Capital follows enforcement rather than a letter grade: A lower risk premium converts into investment only where contract enforcement and clearances are predictable. Eg. The agency itself credited a statutory change, the Insolvency and Bankruptcy Code, for the cleaner bank balance sheets it cited.
   The Fix: Extend the same statutory approach to contract enforcement, with time bound disposal in commercial courts.
4. Assessment is concentrated in a handful of committees: A small set of firms prices capital for the entire Global South, and their method is not open to challenge. Eg. Even a multilateral lender orders its balance sheet around retaining its own top grade.
   The Fix: Build a credible rating agency headquartered in the Global South with a published and replicable methodology.

Conclusion

India holds one A-grade rating and three grades below it, and the gap is now the operative fact rather than the upgrade. The next test is whether the other large agencies move, since a rating changes funding costs only when the market’s benchmark grades change with it. The second test is whether the lower risk weight shows up as cheaper borrowing for Indian issuers rather than as a headline. The deeper question the upgrade leaves untouched is who gets to set the method by which a fast growing economy is judged.

Back2Basics: Insolvency and Bankruptcy Code, 2016

1. What it is: A single consolidated law for the time bound resolution of insolvency for companies, partnerships and individuals, replacing a scattered set of earlier debt recovery laws.
2. How the process runs: A committee of creditors takes charge of the defaulting company through a licensed resolution professional and votes on a resolution plan, with liquidation as the outcome where no plan is approved.
3. The forum: The National Company Law Tribunal adjudicates corporate insolvency, and the Debt Recovery Tribunal handles individuals and partnership firms.
4. The regulator: The Insolvency and Bankruptcy Board of India regulates insolvency professionals, agencies and information utilities under the Code.

[2019, GS3, 10 marks] Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.