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Informist, Wednesday, Sept. 2, 2026

NEW DELHI – Japan Credit Rating Agency Ltd. Wednesday raised India's sovereign rating by a notch to "A-" from "BBB+" on the back of India's "solid" economic growth, the effectiveness of economic policies that strengthen the foundations for growth, and the improved soundness of its financial system. The rating agency upgraded India's foreign currency and local currency long-term issuer ratings by one notch to "A-", while also raising the country's ceiling by one notch to "A".

The Indian economy is expected to retain a high growth rate of over 6% in the financial year 2026-27 (Apr-Mar), supported by robust private consumption and public investment, the rating agency said. Inflation has been rising since the beginning of 2026, reflecting higher food prices caused by unfavourable weather conditions and higher energy prices amid escalating tensions in West Asia, the rating agency said, adding that despite these conditions, inflation has remained within the Reserve Bank of India's target range.

Japan Credit Rating Agency's assessment comes after S&P Global Ratings and Fitch Ratings Inc. affirmed their rating on India at "BBB" and "BBB-" last month. While maintaining a "stable" outlook, both agencies said the country needs to improve its fiscal management to secure a higher rating. 

FISCAL WOES

Japan Credit Rating Agency's assessment of India's fiscal conditions was no different from the others. It remained unimpressed with India's debt and interest repayment burden and flagged some of the structural challenges that it faces. "JCR (Japan Credit Rating Agency) considers that India, a democratic federal state, faces structural challenges that tend to keep fiscal deficits at elevated levels," it said.

These challenges include a complex fiscal relationship between the Centre and the states as well as within the states and the transfer arrangements aimed at reducing disparities among states, according to the rating agency. India also faces risk to its fiscal management as it is susceptible to the electoral cycles, the rating agency said.

To woo rating agencies and keep its interest repayment in check, the Centre has adopted a new fiscal consolidation metric--debt-to-GDP ratio--moving away from tracking a particular level of fiscal deficit. In the Budget for FY25, Finance Minister Nirmala Sitharaman had announced that from FY27, the government would endeavour to "keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP".

Consequently, in the Budget for FY27, the government estimated the debt-to-GDP ratio for the current fiscal year at 55.6% of GDP, 50 basis points lower than the estimate of 56.1% of GDP for FY26. As part of the rolling target, the government is looking to cut its debt-to-GDP ratio to 50%, plus or minus 100 bps, by March 2031.

Corresponding to the debt-to-GDP ratio for FY27, the government projected the fiscal deficit at 4.3% of GDP. The Union Budget had pegged the fiscal deficit for FY27 at 4.3% of GDP, or INR 16.96 trillion. The fiscal deficit target for FY27 will, however, be 4.5% of GDP, based on the downward revision in India's nominal GDP in the new series with FY23 as the base year.

The central government debt-to-GDP ratio is expected to decline gradually, the Japan Credit Rating Agency said. However, the general government debt, including those of state governments, and the associated interest burdens remain high, it added. "JCR will continue to monitor whether government capital expenditure can induce private investment and reduce the economy's dependence on government spending while sustaining economic growth."

In recent years, India has restrained growth in revenue expenditures, including subsidies, while placing greater emphasis on capital expenditure, particularly infrastructure investment, that helps raise the economy's potential growth rate. The quality of fiscal expenditure has therefore improved, the rating agency noted. 

The Modi government has increased capital expenditure by over six times since FY15 to INR 12.21 trillion in FY27, up 11.5% from the revised estimate of INR 10.96 trillion for FY26.

MACRO STRENGTH

All said, the rating agency noted that India's strong macroeconomic fundamentals provide the ecosystem for economic conditions to improve as compared to the past. India has steadily implemented policies conducive to productivity growth and economic development, including the development of digital public infrastructure and the implementation of the goods and services tax, it said.

These steps have also helped India's GDP to grow 7.8% in the June quarter with growth seen across the sectors. The growth was mainly driven by the manufacturing and services sectors, which rose 9.2% and 10.0% on year, respectively. On the expenditure side, private consumption and public investment also supported the growth in Apr-Jun. The RBI has projected the Indian economy to grow 6.7% in the current financial year. The Indian economy had expanded by 8.6% in the March quarter, and 6.9% in the June quarter of FY26.

Given its robust domestic demand, India continues to register a trade deficit, the rating agency said. "However, its current account deficit stays contained, supported by a surplus in the services balance." The current account deficit widened to $4.2 billion, or 0.5% of GDP, in the June quarter from $3.4 billion, or 0.4% of GDP, a year earlier as merchandise trade deficit expanded sharply.

Foreign exchange reserves are ample, the rating agency said, adding that the reserves "significantly exceed its short-term external debt, providing the country with strong resilience to external shocks." India's reserves rose to an all-time high level of $729.33 billion as of Aug. 21, helped by a sharp rise in capital inflows under the RBI's swap schemes.

FUTURE TRAJECTORY

Japan Credit Rating Agency said it could change India's rating from "A-" depending on various factors, including a change in the country's position on fiscal deficit and balance of payments. The credit rating could alter with an increase or decrease in its fiscal deficit or surplus and public debt as it can change their debt payment liability less or more bearable.

"The credit rating is subject to alteration if there is a change in the issuer's international balance of payments and international investment position and thereby an improvement or deterioration of its liquidity positions," the rating agency said. "The credit rating is subject to alteration if there is an improvement or deterioration of the issuer's economy or financial systems, etc," it also said. "The resultant alteration of the credit rating is usually by a notch, with possibility of a few notches if and when the change is large."

Japan Credit Rating Agency also said the sovereign rating can change if there is a change in India's social and political conditions or economic and monetary policies, leading to improvement or deterioration of the economy and fiscal positions. The credit rating is also subject to changes in the wake of domestic unrest, war, natural disaster, among others, which could cause a significant change to the economy and fiscal positions.  End

US$1 = INR 94.96

Reported by Priyasmita Dutta and Shweta

Edited by Shubhayan Bhattacharya

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