Indian Prime Minister’s vaccine celebration may really be a pitch for a ratings upgrade

• Modi highlighted India’s ability to undertake a massive vaccination campaign along with a bunch of other reforms including liberalisation of key sectors.
  
  
• The Indian Prime Minister’s emphasis on the recent economic recovery could have been aimed at the global credit ratings agencies who rank India among the lowest within the investment grade.
  
  
• India has been pushing for better credit ratings, and inclusion in the global bond indices, to reduce the cost of borrowing.
  
  
• Check out the latest news and analysis on Business Insider.

India crossed a billion vaccinations and a celebratory address from Prime Minister Narendra Modi was in order. However, his speech turned out to be something more than just that.

Modi highlighted India’s ability as a pharmaceuticals hub, a strong economic recovery, the recent policy reforms including that of infrastructure pipeline, and the potential of the country as a consumer market and a production hub ⁠— and all of these underscore an agony in New Delhi that has persisted for a long time now: India’s sovereign rating is still the lowest in the investment grade across ratings agencies.

“Wherever we look, there’s optimism. Experts from other countries are also optimistic about the nation’s economy. Companies are getting record investments. Many startup unicorns have also emerged,” he said. Here’s the full text of the speech.

Here's the entire speech from India's Prime Minister Narendra Modi celebrating a billion vaccinations in the country.

The Indian government has argued for an upgrade for a long time. In January this year, the annual Economic Survey, from the Ministry of Finance, pointed out that never in the history of sovereign credit ratings, has the fifth largest economy in the world been rated at the lowest rung of the investment grade except in the case of China and India.

Here’s why ratings matter

Ratings reflect a country’s ability to repay its debt and it is firms like Moody’s, S&P and Fitch that decide what it should be based on the economic growth and financial health of the exchequer. The ratings are an important factor in drawing precious dollars from foreign investors and the cost of borrowing for the government.

Rating agency Moody’s has recently upgraded the outlook to ‘stable’ but it’s a lot less than what India wants.
"We intend to iron out all issues to see India's inclusion in global bond indices… We are working with bond index agencies to work out remaining issues,” Principal Economic Advisor Sanjeev Sanyal said in a recent interview.

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What is a global bond index?
Think of a global bond index like the Sensex but for bonds. And India wants its debt to be a part of it. It adds a stamp of credibility, and the rating denotes repayment capacity, which will draw more foreign investors to buy government debt. India will be able to borrow money at a cheaper rate than what it does now.

KV Subramanian, the Chief Economic Advisor who recently stepped down, was scathing in his critique of how India is rated. “Moody’s, in general, is very conservative with their ratings. They are always behind the curve. In the present economic scenario, with activities picking up, macro-economic data showing signs of recovery, the banking reforms that have been done – adding all that together, Moody’s is gapingly behind the curve with respect to India,” Subramanian said in his interview on October 8.

While equity market analysts have lauded India’s recent economic recovery, the credit rating agencies have been a lot less sanguine. The International Monetary Fund has projected India to be the fastest-growing major economy in 2021.

In the face of a pandemic, and all the expenses that it entails, India has embarked on an ambitious investment plan for infrastructure development, privatising companies including the ailing national carrier Air India, reducing the number of state-owned companies in banking, allowing for a larger role for private players in sectors like defence equipment manufacturing, mining, atomic energy, agriculture and railways ⁠— the five strategic sectors identified by the government.

For instance, the number of government-owned banks in India has come down to 12 from 27 five years ago.

While Moody’s has projected that India’s economic growth may average out at about 6% over the medium term, it hasn’t enthused the policymakers in India. They want the world to acknowledge the steps taken by the government to boost investment instead of focusing on just the fiscal deficit ⁠— which is the difference between what the government earns and spends.

It is to be seen if the Prime Minister’s pitch will cut some of the ice with those who control the ratings.

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