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Could India have a sovereign credit rating drop?

The UK and South Africa have been in the news recently owing to a drop in their sovereign credit rating, with the latter having their rating downgraded to junk. As countries around the world battle with slowing GDP and increased fiscal loosening to sustain and revive the economy, their creditworthiness takes a hit.

In today's post, we analyze countries that have had a rating drop in the recent past and analyze the impact it has had on them, where India's rating currently stands and the view rating agencies have had, and the factors and triggers that could lead to a drop for India.

UK & South Africa

The last thing you need in the middle of a crisis is a credit rating drop. Yet that is exactly what these countries got, with South Africa particularly affected with its sovereign rating falling from Investment grade to Junk.

The UK had the misfortune of having to deal with the Brexit crisis before the covid pandemic began. This effectively meant that unlike the US which was entering the period of crisis from a position of economic strength, the UK was entering it from a position of relative weakness. The credit agency rating Fitch forecasted a 4% drop in the annual GDP raising concerns over its fiscal loosening stance. The country had a rating downgrade from AA to AA-.

South Africa saw a much harsher reaction with its ratings downgraded from Investment grade to Junk. Moody's is effectively the last agency to give the verdict, with S&P and Fitch having already downgraded the country in as early as 2017. Here too, the country was entering the crisis from a position of weakness after a prolonged economic slowdown. The classification by all agencies as junk is especially bad given the impact it has not only on the currency, but also reducing the pool of foreign investors and funds who would consider investing in the country.

India's current rating and position

India's credit rating from Moody's stands at Baa2, with the outlook modified to negative back in 2019 before the crisis began. This rating is just one above Baa3, which is the lowest investment-grade rating. Over the last few months, the GDP growth estimates have come down sharply for almost all rating agencies and the economic outlook remains weak for the near future.

Factors that could work against us

Rating agencies across the globe have been critical of a fiscal loosening stance. This is effectively where the government increases spending to put more money in the hands of the people, and is often a stance adopted in times of economic hardship as we have been seeing now.

In that context, India's fiscal picture doesn't look too pleasant now. The sources of funds at the disposal of the government are all either shrinking or infeasible. As people lose jobs or face pay cuts, the income tax the government receives will begin to shrink. As consumption goes down GST collections will also begin to slow down. And disinvestments, one of the primary ways the government had decided to unlock money seem increasingly infeasible or non-ideal in the current market environment. The drop in sources of funds, combined with the sharp increases in the uses of funds that we have seen and will probably continue to see - first to keep a large part of our below poverty line population well-fed through the crisis, and then to revive the economy and industry will put the fiscal deficit number under a lot of stress.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.

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Very informative

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