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The Indian government is currently holding discussions with credit ratings agencies (CRAs) as it feels India’s sovereign rating doesn’t reflect the true state of the country’s economy. Finance Secretary Ajay Seth told reporters on Friday that the central government is holding “intense discussions” with CRAs and asking them to rework on their methodology of sovereign ratings.

“The CRAs assign 15% weight to ‘governance’ and they take this input from World Bank’s ‘Worldwide Governance Indicators’ (WGI), which needs restructuring,” Seth said at the side-lines of an event organised by Ashoka University and ICPP.

“We are in touch with World Bank, and they are likely to change their methodology of ranking India in the WGI, soon,” he added.

The WGI is a composite index of several sub-indices, such as political stability, control over corruption, regulatory quality, rule of law, voice and accountability, and government effectiveness. In 2023, India’s percentile rank in governance effectiveness was 67.9, meaning it was better than 67.9 countries. In 2022, the score was 63.2 and 2014, it was 45.2.

In December 2023, a finance ministry paper had said that the sovereign rating of India has “remained static” at ‘BBB-’ during the last 15 years, despite the country climbing the ladders from the 12th largest economy in the world in 2008 to the 5th largest in 2023. “This has serious implications for developing sovereigns’ access to capital markets and ability to borrow at affordable rates,” the paper authored by economists led by chief economic Adviser had said.

To be sure, S&P Global has maintained India’s sovereign rating unchanged since 2007. Similarly, Fitch has held its rating steady since 2007, and Moody’s since 2004.

The paper had said that while CRAs expect sovereigns to make improvements in the quality of their governance, reduce market risks, and improve the regulatory environment, the agencies themselves offer no insights or guidance on exactly what factors are part of their considerations and suggestions. “This opaqueness makes it difficult for any country to fully understand what reforms are needed to earn a credit rating upgrade.”

State loans’ ratings

The finance secretary also batted for developing a framework to rate state development loans (SDLs) specifically. “There needs to be a fiscal discipline among states, which can be ensured through rating of the SDLs,” he said.

State Development Loans (SDLs) are bonds issued by state governments to fund their budgetary needs, including fiscal deficits and developmental projects. These bonds are backed by the state's revenue and are offered to investors who seek a secure and relatively higher-yielding investment option.

Seth said that CRAs should build a framework to rate the SDLs, as more than half states are running revenue deficits. However, he didn’t name any state.

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