India’s investment grade sovereign rating is now the lowest with a negative outlook from all three major global agencies: S&P, Fitch and Moody’s with warnings to downgrade as low as the “junk category”.
- During the Covid-19 pandemic, India’s debt-to-GDP rose to 90 percent, says IMF.
- Moody’s downgrades India’s sovereign rating to Baa3 investment grade, just a notch above ‘Junk’ grade.
- The Indian rupee transitions from being Asia’s best in the previous quarter to the worst-performing currency.
- Modi Government’s goal of achieving $5 trillion GDP by 2024-25 is becoming more unreal as the country’s economy needs to grow at 11.6 percent during the next six years.
As India emerges as the new hotspot of COVID-19 amid a devastating second wave of infections, investors are beginning to question whether the country that has long been touted as an emerging economic superpower is deserving of its current ‘Investment Grade’ status. The prognosis has been made worse by a pattern of patchy reforms and years of debt accumulation. India’s Investment Grade credit ratings are already standing on their last legs after a series of downgrades in 2020, and the severity of the ravaging second coronavirus wave is making agencies like Fitch, Moody’s and S&P anxious again.
Any revision in India’s Investment Grade Status could well unravel a string of complications that can not make economic revival hard but also make PM Modi’s $5-trillion economy a more distant dream than a tangible reality.
Credit Ratings Cuts in the Offing
The three main rating agencies – Fitch, Moody’s and S&P – have hinted at the possibility of further downgrading India’s growth forecasts, amid the growing likelihood that the government’s debt as a share of the GDP will climb to an unprecedented 90 percent in 2021. That would be an anomaly hard to overlook. The median debt level in the BBB bracket, in which India falls currently, for Fitch is about 55 percent. Even countries in the low-spectrum ‘junk’ grade also have a debt percentage of 70 percent.
With the COVID-19 pandemic causing India’s debt level to mount, it is beginning to look like the country could be doomed to languish in the lowest rungs of the junk grade. Fortunately, such a downgrade is not an immediate threat, as rating agencies have indicated their willingness to wait for the latest wave to blow over before making any adjustments.
Even so, the possibility is making investors nervous about putting their money into ratings-dependent assets such as bonds. The pattern of FIIs steadily pulling money out of the Indian markets since March, which coincides with the beginning of the second wave, makes for a strong case in point.
Watch: Moody’s downgrades India’s sovereign rating to ‘Baa3’ maintains negative outlook
A Ratings Cut Could Have a Domino Effect
Last year’s unhurriedly announced lockdown to break the chain of transmission caused the Indian economy to shrink by 24 percent. Analysts believe that the country needs a steady 10 percent growth to recover from it and stabilize the public debt. With the raging second wave that has stripped the entire healthcare system threadbare and shriveled up economic activity once again, that 10 percent growth target looks unattainable. As per Moody’s predictions, the growth is expected to settle in the ballpark of 6 percent that too for the long term.
That’s why a downgrade in India’s Investment Grade ratings is more a matter of when than if. When it does come to pass, India will join the ranks of South Africa and Brazil – two of its BRICS allies – as a ‘fallen angel’, rating agency parlance for demotion to the junk category.
This can result in a domino effect, setting off a tide of problems. For one, such a downgrade would mean that the government and its corporate bonds would be excluded from certain high-profile investment indexes. This could result in investors selling out conservative funds. Besides, there is a risk of investment-grade corporate debt worth $40-45 billion being cut. In short, there will be a lot of selling of assets and fewer investments.
The Indian rupee has been among the world’s worst-performing currencies of late, and Indian stocks have seen a near 7% dip on big global indexes. A potential downgrade could deal a disastrous blow to the economy, sending India back to its financial standing in the late 80s.
What Would It Mean for Modi’s $5-Trillion Economy Posturing?
A cut in India’s Investment Grade would also come as a huge setback to PM Modi’s target of building a $5-trillion economy by 2024-25. The events of last year’s wave and the measures taken to contain it alone pushed that lofty economic goal back by at least three years.
A repeat of 1991 when India was stripped of its ratings by S&P in response to the balance payment crisis could be a chastening moment for the country’s goals of competing with advancing economies like China. Despite sizable currency reserves, India still remains the lowest in terms of prosperity levels among all Investment Grade countries.
However, there is a section of economic experts, like former economic affairs secretary Subhash Chandra Garg, who remain hopeful despite acknowledging that the double-digit deficit and growing debt position are a matter of grave concerns.
However, for any hope of a turnaround to sustain, debt levels must climb down steadily and swiftly. That can only happen with a strong growth pattern that cannot be based on and sustained by government stimulus alone.