Why in news? 

Fitch Ratings revised India’s outlook from ‘negative’ to ‘stable’ on, June 10, 2022, citing fading downside risks to medium-term growth thanks to a rapid economic recovery and easing of weaknesses in the financial sector.

Highlights:

• The global rating firm has, however, lowered its GDP growth forecast for 2022-23 from 8.5% projected in March to 7.8% due to the impact of inflation on the growth momentum
• Despite near-term headwinds from the global commodity price shock, Fitch said it expects robust growth for India relative to its similarly rated peers, but the country’s public finances remain a credit weakness with the debt ratio broadly stabilising, based on its expectations of ‘persistent large deficits’.
• The firm affirmed India’s long-term foreign currency issuer default rating at ‘BBB-’ while revising the outlook, noting that this ‘balances India’s external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators’.
• A BBB rating reflects low expectations of default risk with adequate capacity for payment of financial commitments, although adverse business or economic conditions are more likely to impair this capacity.
• Higher subsidies this year along with the excise duty cuts on fuel to offset the surge in consumer prices will cost about 0.8% of GDP. This will push the fiscal deficit of the Centre to 6.8% of GDP from the 6.4% Budget target for 2022-23, despite robust revenues, it reckoned.
• Despite India’s high public debt, its ability to finance deficits domestically is a strength for the country vis-à-vis its peers, Fitch said, pointing to a mere 2% of government securities being held by non-residents, and foreign currency debt at just 5% of India’s total debt, as opposed to the median rate of 33% for BBB-rated countries.

The challenges to the forecast

• The uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms.

Fitch Ratings

• Fitch Ratings is considered one of the big three credit rating agencies in the world, the other two being Moody’s and Standard & Poor’s (S&P’s).
• It is headquartered in New York and London.
• It was founded in 1914.

Fitch Rating System

• The Fitch Rating system uses a letter system, quite like the one used by S&P’s.

What is credit rating?

• A credit rating is an assessment of the creditworthiness of a borrower. This borrower could be companies, individuals or governments.
• While individuals are assigned ‘credit scores’, governments and corporations are given ‘credit ratings’.
• An important thing to remember is that governments are given credit ratings and not countries.
• The credit worthiness of a country or a sovereign entity is called a sovereign rating.

Importance of credit ratings

• Basically, the credit rating of a government indicates its ability to pay back the money borrowed.
• Governments of countries need these rating to borrow money.
• Credit ratings also indicate a country’s worth as an investment destination.
• A country requests a credit rating agency to assess its economic and political environment and arrive at a rating.

• This is done to attract FDI to the country.