India’s Rating Downgraded | 02 Jun 2020

Why in News

Recently, ratings agency Moody’s Investors Service downgraded India’s sovereign ratings from Baa2 to Baa3.

Key Points

  • Reason:
    • The ratings agency cited slow reform momentum, constrained policy effectiveness and slower growth compared to India’s potential among the reasons for the downgrade.
    • Covid-19 pandemic has only amplified the vulnerabilities in India’s credit profile that were present and building prior to the shock.
    • The rating has been downgraded in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic.
  • Lowest Grade:
    • Baa3 is the lowest investment grade in Moody’s rating ladder.
    • This means, India is just one notch above the non-investment grade or junk grade.
    • Moody’s had upgraded the country’s rating to Baa2 in November 2017.
  • Lowers Growth Forecast:
    • According to Moody, India’s real GDP growth rate will contract by 4% in 2020-21 due to the shock from the coronavirus pandemic and related lockdown measures.
      • It expects the economy to grow 8.7% next financial year and closer to 6% in the subsequent year.
      • India’s GDP growth slipped to an 11-year low of 4.2% in 2019-20. The fiscal deficit also expanded to 4.6% of the GDP as against the revised estimate of 3.8% of GDP in the previous financial year.
  • Other Economic Issues:
    • Credit Crunch: The rating agency did not expect the credit crunch in the country’s under-capitalised financial sector to be resolved quickly.
    • High Debt Burden: The fiscal constraints point to a higher debt burden for a longer period of time.
      • The lower GDP growth over the medium term will diminish the government’s ability to reduce its debt burden after a significant rise due to the coronavirus economic shock.
    • Lower Tax Revenue: India’s large low-income population will limit the government’s tax revenue base.
  • Government effort not adequate for sustainable growth:
    • The government response to the growth slowdown prior to the coronavirus outbreak as well as the recent support package for vulnerable households and small businesses is not enough to restore the sustainable GDP growth.

Credit Rating

  • A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or 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, corporation, state or provincial authority, or sovereign government.
  • A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
    • Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
    • Investors use sovereign credit ratings as a way to assess the riskiness of a particular country's bonds.
    • Obtaining good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets.
  • A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
  • The Big Three Credit Rating Agencies: Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of global ratings business.
  • In India, there are six credit rating agencies registered under Securities and Exchange Board of India (SEBI) namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

Source: IE