How gaps in governance standards weigh on India's sovereign ratings

Fitch Ratings keeps country at lowest investment grade, citing poor scores in political stability and corruption control

Fitch Ratings last week maintained India’s sovereign rating at the lowest rung of investment grade (BBB-), citing the country’s poor grades in World Bank’s governance index as one of the reasons for its decision.

 

The Bank’s Worldwide Governance Indicators (WGI) is a snapshot of 200 countries, including India, and tracks six areas: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. Based on inputs from more than 30 global think tanks, international agencies, NGOs and private companies, WGI is among the most widely used benchmarks to assess governance quality. 

 

India has made modest gains over the past five years. It scored 51.5 and 41.5 out of 100 for voice and accountability and control of corruption in 2023, regressing from 56 and 44.8 in 2019.

 

Political stability is the country’s most pressing governance challenge, with scores stuck below 25 for five years: 19.3 in 2019 and 21.3 in 2023, the last time WGI data was compiled.

 

Government effectiveness has steadily improved — from 59.0 in 2019 to 67.9 in 2023 — to reflect stronger institutional performance. Regulatory quality and rule of law have also inched up. India’s overall average governance score was 47.6 in 2023, marginally higher than 46.3 in 2019. 

 

Compared with other emerging economies with similar Fitch credit ratings, India’s overall governance score is close to Indonesia’s 49.2. Government effectiveness score (67.9) is almost at par with Indonesia (69.8). All emerging economies except Mexico scored above 50 in 2023. 

 

Fitch classifies ratings on a scale from ‘AAA’, the safest, to ‘D’, default. ‘BBB+’ signals stronger capacity to meet commitments than ‘BBB’, which indicates better financial capabilities than BBB- (India’s rating). The ratings influence borrowing costs and investor confidence in a country’s economy.

 

Countries with similar WGI scores generally hold comparable credit ratings, though differences can be seen in their outlook. The ‘+’ or ‘-’ sign is often added to a rating to indicate a country’s relative position within the broader rating category. 

 

Fitch said that India’s strong growth and resilient external finances support its credit profile, but “lagging structural metrics, including governance indicators and gross domestic product per capita, also constrain the rating”.

 

The agency’s affirmation of India at BBB- with a ‘stable outlook’ reflects how shortcomings in political stability, accountability, and controlling corruption continue to weigh on the country. Institutional reforms and greater transparency could help strengthen investor confidence and pave the way for a future rating upgrade.