Why S&P finally raised India’s credit rating

In today’s episode on 22nd August 2025, we tell you why S&P Global hadn’t upgraded India’s sovereign credit rating for 18 years, and why it has finally done so now.

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  Hello folks, you're tuned into Finshots Daily. In today's episode, we tell you why S and P Global hadn't upgraded India's sovereign credit rating for 18 years and why it has finally done so now. Before we begin, here's a quick word from team Ditto. Life has a way of surprising us and not always in a good way. Sometimes it's a sudden illness or an unexpected hospital visit that can shake up everything. In India, families still pay about 39% of medical expenses directly from their own pockets and just one hospital's take can wipe out years of savings. The easiest way to protect yourself is by getting a good health insurance plan. It's way cheaper than footing one huge bill. And if you're unaware where to start, book a free call with Ditto. No spam, just honest, jargon-free guidance.

• 0:45Speaker 00

  Trusted by over 8 lakh people for their health and term insurance needs. The link is in the description. Now, back to the story. A few days ago, India got a sovereign credit rating upgrade from S and P Global. We moved up from triple B minus to triple B. And if that feels like a small step, remember this. India's last upgrade to triple B minus happened way back in 2007. So, this one comes after an 18 years wait. Now, if that sounds a little too technical, let's break it down. Think of credit rating as nothing more than a report card on someone's ability to repay loans. It could be a person, a company or even a government. So, when we say sovereign credit rating, we're basically talking about a government's credit score.

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  Why does a government even need that, you ask? Well, running a country isn't cheap. Taxes and export earnings alone don't always cover the bill. So governments often have to borrow, whether from global institutions like the IMF or World Bank, from other countries or even from investors worldwide. And one popular way they do this is by issuing government bonds, which are basically IOUs. The government takes money now, promises to pay interest along the way and returns the full amount when the bond matures. But before lending money, investors need to know. Can the government really pay me back? That's where sovereign credit rating comes in. And S and P isn't the only one doing this. It, along with Moody's and Fitch, controls nearly 95% of all credit ratings in global markets.

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  Which is why, when any of them upgrades India, the world takes notice. Now, about those alphabets, triple B, triple A, D, well, they're just part of a scale. At S and P, triple A is the gold standard, the safest of the safe. Triple B is the lowest rung of what's called investment grade. Anything below that is politely called junk. So, India's new triple B rating simply tells global investors, "Your money's relatively safe here, but if things go wrong, repayment capacity could get tested." So, yes, one minus sign dropped off, but what does that actually mean for us? Well, investor confidence gets a nice boost. That means India could find a bigger place in major global bond indices like JP Morgan's or Bloomberg's,

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  and here's why that matters. Many large funds automatically pour money into countries listed in these indices. So, if India gets a higher rate, billions of dollars could flow into Indian bonds. More foreign money, more liquidity and lower borrowing costs for the government because lenders now see less risk. That has already played out in the markets. Soon after the upgrade, India's 10-year bond yield, that is the interest rate, fell from 6.51% to 6.4%. Of course, it bounced back later because bond yields move on more than just credit ratings. Well, for instance, when the Prime Minister hinted at a big GST reform, yields spiked again. Why was that? Because investors worried that the new structure could reduce revenues

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  or create uncertainty over how money flows to the centers and state, potentially weakening the government's finances and its ability to repay debts. But while you've probably seen all that in the headlines, here's the real question. Why did it take S and P 18 long years to upgrade India? And why now? Well, the short answer is India's fiscal health. To begin with, India's public debt, that is the money the government owes, has been a thorn in the side for decades. For context, it was about 60% of the GDP in 1980s, went up to 70% in the 1990s and 80% in the 2000s. After dipping a bit, Covid hit and debt shot up close to 90% of GDP in 2020-21.

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  Alongside this, the fiscal deficit, which is basically when governments... Spending out strips income often stayed in the seven to eight percent range and during covid, it blew up to a record of thirteen point one percent. Interest payments added more pressure. Even today, India spends about five percent of GDP just on servicing old debt. That's more than what goes into education, health or or even capital expenditure on new infrastructure. And here's another interesting bit. In the past forty years, India's managed a primary surplus just once in two thousand seven and eight. That's when the income exceeds expenses before interest payments. By FY twenty five, central government debt touched one ninety seven lakh crore rupees, while states added another ninety four lakh crore rupees.

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  That's nearly double what it was just seven years ago. Compare that to other emerging economies where debt to GDP averages closer to sixty percent and fiscal deficits are on five percent. And you can see why agencies like S and P were reluctant to budge. But things look a little better now. The overall debt to GDP ratio that is center and states put together has eased to around eighty three percent. The overall fiscal deficit is down to seven point eight percent. Growth, though slower than before, is still steady at about six point five percent and that is among the best globally. And if this trajectory continues, debt could fall to around seventy eight percent of GDP by twenty thirty with deficits easing as well. That gives rating agencies some comfort. Another sticking point was India's weak tax to GDP ratio.

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  It peaked at twelve point five eight percent in two thousand seven and eight, but later slipped. It's now crawling back up to eleven point six percent and could inch towards twelve percent by FY twenty six. Still not great, but moving in the right direction. After that, the bouts of high inflation and swings in interest rates and you've got another headache. Rising prices eat into investors' returns, drag down growth and even weaken the currency. Well, all of which make rating agencies think twice before handing out an upgrade. And that's really why S and P played it safe all these years. They wanted long term proof, not short term buzz of numbers. Sustained fiscal improvement, higher tax revenues and structural reforms were their checklist.

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  And now, after nearly two decades, they seem convinced enough to give India that small but significant push from triple B minus to triple B.

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  But that doesn't mean it's time to pop the champagne just yet. Remember that line we mentioned earlier? If things go wrong, repayment capacity could get tested? Well, yeah, that's the catch. Meaning if we'd like to keep our rating upgrade, India has to do a lot of things right with its economy. S and P has already hinted that a further upgrade is possible, but only if India manages to narrow its fiscal deficit in a big way. In fact, they've said the net change in government debt needs to consistently stay below 6% of GDP. Now, while that sounds neat on paper, the twist is that S and P projects India's combined fiscal deficit will only dip to about 6.6% by the end of the decade. So that target feels like trying to touch the ceiling while standing on your tiptoes. You're close but not quite there yet.

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  And then there's the debt problem. It needs to shrink meaningfully too. But that looks tricky right now, especially with both direct taxes and indirect tax rates trending downwards. Sure, lower taxes could mean more people filing returns, more consumption led spending and eventually better revenues. But until that plays out, the math looks a bit shaky. The only comforting sign is inflation. Headline inflation, which combines core items like education, rent, healthcare and transport with non-core items like food and fuel, has eased closer to around 2%. That gives the RBI enough confidence to cut interest rates back in Feb, a move that could support growth and also make managing debt a little easier for the government in the short run. But when the next upgrade will come is honestly anyone's guess.

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  And whether it will come at all is something we'll just have to wait and see.

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  Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected]. Until next time.