Sovereign Ratings are ratings assigned by internationally known rating agencies to countries. While the primary intention behind these ratings is to classify the risk associated with investments made in the Soveriegn Debt of the nation, they're increasingly taken as an indicator of the relative safety of investing in any asset in the country. This is because each country has it's own currency (well, most do) and this currency represents an obligation of the government to holders of the currency. Since most domestic assets in a country are denominated and traded in it's own currency, the safety and stability of the currency is the major determinant of the safety of these assets.
Soveriegn Ratings take many factors into account. Most important amongst these are the ratio of Government Debt to the GDP of the nation, ratio of foreign currency obligations to GDP and interest coverage ratio which is the ratio of all debt service payments to government revenues for a particular time frame.
The first two are stock indicators which are representative of the long term sustainability of government finances. Interest coverage is a flow indicator, a short term measure which indicates how comfortable a government is servicing it's debt.
With the definitions out of the way, it's time for a small story.
Once upon a time, there were two governments which spent more than they earned. One which planned it's income & expenditure on a yearly basis, didn't make many open-ended commitments and borrowed an amount equal to it's mismatch every year. Over a period of time, due to this policy, this country ended up with accumulated debt equal to 75% of it's GDP and long term commitments which equalled another 67% of it's GDP. Because a major part of its borrowing was conducted within its borders and denominated in it's own currency, its foreign currency obligations were small at about 5% of GDP. It's Interest cost was about 14% of revenues, but it in a scenario where it had accounted for most of it's obligations.
The other country took a different path. While it did have a yearly income & expenditure plan, a bulk of it's commitments spanned many decades into the future. Since, these commitments could not be quantified immediately, they weren't accounted for as liabilities in government books. At the same time it also overspent on an annual basis and it's debts amounted to about 85% of GDP. The borrowings were conducted globally, and as the world was ready to trust it's currency, it had no foreign currency obligations. But it's future commitments were so large that they dwarfed it's accounted debts. In fact, they grew to be much larger than GDP itself, 7 times larger. Since a bulk of this country's obligations were unaccounted, it's interest cost remained restricted to 11% of GDP.
International rating agencies rated both these countries, and in their own indecipherable manner, rated the first country BBB-, the lowest investment grade rating and rated the second country AAA, the highest possible rating.
Besides this, they kept on warning the first country that any slippage in it's fiscal imbalance would lead to a lowering of it's rating, an event which would spook foreign investors.
The first country in this story is India. The second is the United States of America.
While the story itself is a simplified narration, the numbers are all from either government sources or independent studies. Independent of the rating agencies, that is. India's unaccounted obligations are primarily pension obligations towards Central and State Government employees, both past and present. The unaccounted obligations of the US are on account of Medicare and Social Security.
Yes, there are areas in which India can improve. Government tax revenues are just about 10% of GDP as compared to 30%+ for the US. And interest costs are high due to high interest rates as well. If tax collections were to improve, and they are improving, with the current year's target at 11.5% of GDP, and interest rates were to reduce for an extended period of time, interest coverage would improve as well. Probably to a level below that of the US. The point is that India is in a position to improve it's indicators of indebtedness significantly as it's problem lies in the flow and not the stock. The US, on the other hand has a problem with it's stock of debt, a problem which can be extremely difficult to solve.
But as far as the international rating agencies are concerned, the US is still AAA and India's a poor BBB-....
Did I mention the word "scam" earlier? Well then, there's nothing more to say.