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

For decades, our unrealised quest was to be an 'A'-rated sovereign. This eluded us. Many of us who interacted with rating agencies remained perplexed by their opaque methodology. The predilections and biases successively penalised fast-growing emerging markets even with low external debt and sound macroeconomic frameworks. The duality of standards, often based on territorial location of economic activity, influenced the outcomes. Finally, on September 2, came a breakthrough. The Japan Credit Rating Agency upgraded India's long-term sovereign rating, from BBB+ to A-, and the country ceiling was raised to A. The last time India held an A-grade was January 1988, when Moody's assigned us the A2 rating. However, our borrowing fuelled growth of the 1980s meant the A-grade did not last. 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. The continued political instability of three prime ministers in as many years inevitably delayed reforms. The prospect of fiscal rectitude was not in sight. Thereafter came the First Gulf War, rising oil prices and India's Balance of Payment crisis. By October 1990, India was downgraded to Baa1. By mid-1991, our reserves barely covered a few weeks of imports and investor psychology was weak. We were further downgraded to non-investment grade. Notwithstanding credible progress through successive governments thereon, efforts to secure the A-grade were not accepted. Thirty-six years passed by since the A-grade was lost. Sovereign credit ratings are independent assessments of a country's creditworthiness by leading global rating agencies. They range from the coveted AAA to 'junk' status, with BB+ and below classified as non-investment grade (junk). It is a probability of default, expressed as a letter grade. Under Basel III regulations, they remain embedded in the capital rules of banks. A sovereign upgrade potentially lowers the 'risk weights' or the capital that banks must hold against government debt. Lower risk weights mean stronger demand for sovereign bonds and cheaper funding. A downgrade would mean the opposite. The industry itself dates to 1909, when John Moody began grading American railroad bonds, with sovereign ratings following in the 1920s. The agencies that dominate: S&P Global, Moody's, Fitch, Japan Credit Rating Agency, R&I of Japan and Morningstar DBRS. Agencies assess institutional strength and governance, economic structure and growth. External accounts and reserve adequacy, the fiscal position, the foreclosure of revenue for servicing debt and debt path, and monetary flexibility come into play. This framework can, however, be opaque with judgement. A territorial divide emerges between advanced economies and the Global South. Yet they remain important because they influence boardroom decisions of investors. Curiously, even international institutions like the World Bank (obsessed with retaining their AAA rating) and some sovereign governments are also conscious of the rating they secure. The Japan Credit Rating Agency itself cites 'high growth rate of around 7 per cent, supported by robust private consumption and public investment', 'supported by personal income-tax cuts and reductions of GST rates, with the economy growing 7.7 per cent in real GDP terms' and 'the banking sector's gross nonperforming loan ratio [which] declined to 1.8 per cent… supported by the establishment of Insolvency and Bankruptcy Code, capital injections by the government'. Almost every item on that list is structural rather than cyclical. We must also recognise that their decision comes at a time notwithstanding the odds and uncertainties of tariff frictions, tensions in West Asia and elevated oil prices. These fears have been quashed by India's macroeconomic and political stability, and continuing structural reforms. This paradigm shift, more than any single number, is what the A- represents. It is symbolic of the confidence in India's long-term growth prospects. This increases the pressure and 'nudge' effect on other rating agencies: S&P Global, Moody's and Fitch, which hold India at BBB, Baa3 and BBB-, respectively. Generally, agencies are wary of being conspicuous outliers. The upgrade arrived days after the first quarter estimates for 2026-27. India recorded real GDP growth of 7.8 per cent, nominal growth of 10.3 per cent, real GVA growth of 8.2 per cent and gross fixed capital formation growing 11.9 per cent. Some critics have wrongly suggested the number is contrived but this charge does not survive basic scrutiny. GDP series are revised the world over as the structure of an economy changes and more granular data become available. India has revised its series many a times: 1948–49, 1960–61, 1970–71, 1980–81, 1993–94, 1999–2000, 2004–05, 2011–12, and 2022–23. More importantly, this revision addresses what IMF's assessments had flagged in our old GDP series. In particular, the outdated base year and its reliance on wholesale rather than producer prices. The new series introduces Output Producer Price Index, adopts double deflation across sectors, including manufacturing, and aligns us closer to the global System of National Accounts (SNA) 2008. MOSPI has stated clearly that the revisions do 'not represent a downward revision made to make the current year's growth appear higher'. The improved implicit deflator now has 'more than 300 individual price deflators' reflecting its granularity. There are three reasons why this moment is significant. First, an unsolicited upgrade to the A-grade is an external verdict, not a negotiated one. Second, it validates institutions built through Centre-state consensus, the GST Council foremost among them, whose pooled sovereignty has no true parallel elsewhere. Third, it should translate into lower risk premia in corporate boardrooms. This is where foreign direct investment decisions are actually taken, and augurs well for inward capital flows. When the crisis in the Straits broke out, many thought India's Goldilocks economy was coming to an end. Despite everything that seemed to be going wrong, the economy remains just right. Growth near 8 per cent, inflation within the band, banks at their cleanest in a generation, and capital arriving rather than departing. Keynes once cautioned against becoming the prisoners of our own habitual ideas. Rating committees are unusually prone to that particular imprisonment. The reforms of 1991 were once dismissed as compulsion rather than conviction. History has been unkind to that verdict. Thirty-six years on, India is back where it belongs. The writer is former chairman, 15th Finance Commission