S&P raised India to BBB in August 2025, its first upgrade in 18 years. New research shows why Fitch and Moody's have held — and four reforms that could change their view.
India's sovereign credit rating has sat at BBB since August 2025, when S&P Global delivered the first upgrade in 18 years. Morningstar DBRS and Japan's R&I followed. Fitch and Moody's have held their ratings, both pointing to the same number: government debt near 84% of GDP, against roughly 60% for peers in India's rating band.
New research from Olivier Blanchard, Daniel Leigh and Ashoka University's Ashok Kotwal looks at what ratings actually respond to, using data from more than 130 countries over 30 years. The study finds three patterns that explain why India's rating has been slow to move.
First, rating agencies care far more about the stock of debt a government carries than about its fiscal plan. Theory says the plan should matter more. In the data, the weight on fiscal plans is near zero for emerging markets.
Second, agencies acknowledge the growth advantage but discount it. When an economy grows faster than the interest rate the government pays, debt shrinks relative to GDP automatically. India's nominal GDP growth runs near 10%, while its effective interest rate on government debt sits between 6.5% and 8.5%. The gap alone pulls the debt ratio down. The research finds that agencies register this effect but assign it little weight.
Third, two countries with identical debt and fiscal plans can receive very different ratings. On the study's 11-point scale, Qatar scores 8, China 6.7, India 4.1 and Brazil 2.6 before fiscal differences are counted. The debt level an emerging market can carry before losing a rating of 2 points ranges from over 160% of GDP for Qatar to under 80% for Mexico. India sits in the middle.
Most of what separates emerging markets in the eyes of the agencies may not be fiscal arithmetic at all. The research points to soft credibility, institutional strength, transparency and confidence. Those are areas a government can shape.
India's combined central and state deficit has fallen from a pandemic peak of 13.1% of GDP to about 7.2%. The Centre has met its fiscal targets every year. The growth-to-interest rate gap makes the headline debt level safer than it looks. The agencies have been slow to reward that.
The study suggests four concrete steps.
Raise revenues to lower the interest-to-revenue ratio
India spends a quarter of all government revenue on debt service, compared with about 9% for other emerging markets. Fitch has explicitly flagged this ratio as one it watches. Gross tax collection has averaged 19% of GDP, below Brazil, China, Russia and South Africa, with an estimated gap of some 7% of GDP between what is collected and what could be. Improving voluntary compliance by simplifying GST would widen the tax base without cutting public investment.
Bring states into the fiscal picture
The Centre collects 58% of government revenue but accounts for 40% of spending. States collect the remaining 42% but spend 60%. Ratings judge the government as a whole. Yet markets discipline only the Centre: sovereign borrowing costs respond clearly to central fiscal performance, while state bond spreads barely move across states with varying finances. Deepening the market for state loans could let markets enforce discipline where central rules have not.
Disclose the hidden liabilities
Guarantees, power distribution company arrears, parastatal borrowings and municipal exposures sit in the shadows of India's balance sheet. Because much of a rating rests on judgements outside the visible numbers, transparency is effective. A consolidated statement of contingent liabilities covering the Centre and states can turn concerns into measured and bounded ones. The Comptroller and Auditor General's latest audit reports on state finances have flagged the need for a standardized fiscal framework.
Move toward the debt anchor Parliament approved in 2017
Under current projections, India's debt drifts down to 80% of GDP by 2031. Accelerated consolidation would bring it to about 79%. A more ambitious path could reach 77%. Rating agencies would reward that compression.
There is a broader question India is positioned to raise. If ratings weigh old debt heavily, discount a growth advantage and load the rest onto institutional judgements, then fast-growing economies with long-maturity, domestically-held debt are being assessed more harshly than the numbers warrant. Ratings shape borrowing costs, and borrowing costs shape how many roads, grids and schools a country can build.
Asking agencies for greater clarity on their assessments would help India and every emerging market that needs debt capital. India has shown fiscal prudence. The next step is turning that effort into rating gains.
The Ashoka Isaac Centre for Public Policy team contributed to this piece. The author is dean of Ashoka School of Economics and Finance, director and head of Ashoka Isaac Centre for Public Policy, and professor of economics at Ashoka University.
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