S&P Keeps India’s Rating Unchanged; Outlook Stable

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International ratings agency S&P Global Ratings on Friday said that India’s rating remains unchanged at BBB-. The outlook on the country has also been maintained at stable, indicating no change in the rating agency’s view on India. The short term sovereign credit rating stays A-3.

“Despite two quarters of weaker-than-expected growth, India's economy is forecast to grow robustly in 2018-2020 and foreign exchange reserves will continue to rise,” S&P said in a statement today. “Nevertheless, sizable fiscal deficits, a high net general government debt burden, and low per capita income detract from the sovereign's credit profile”.

The stable outlook reflects S&P’s view that, over the next two years, growth will remain strong, that India will maintain its sound external accounts position, and fiscal deficits will remain broadly in line with its forecasts, the rating agency added..

S&P Global RatingsThe ratings on India reflect the country’s strong GDP growth, sound external profile, and improving monetary credibility. India’s strong democratic institutions and its free press promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and relatively high general government debt stock, net of liquid assets.

S&P indicated an upward revision would depend on a reduction in net general government debt and strengthening of the external account. On the flip side, GDP growth disappointment or increase in deficit or slowing momentum on the reform agenda could exert downward pressure on the rating.

This follows a rating upgrade by Moody’s Investors Service. Last week Moody’s upgraded India’s sovereign rating for the first time since 2004, citing continued progress in the nation’s economic and institutional reforms. The rating moved India's rating up by one notch to Baa2 from Baa3. The outlook on the rating is 'stable'.

Explaining the rationale behind the upgrade, Moody’s had said reforms being pushed by the government will help stabilize debt and enhance the country’s growth potential.

Soon after the Moody’s upgrade S&P had reiterated its Oct. 24 comments that "for an upgrade, India would have to address its weak fiscal balance sheet and weak fiscal performance." India has a relatively high debt-to-GDP ratio of 68.7 percent. The central government is targeting a fiscal deficit of 3.2 percent of GDP for the current fiscal.

Fitch Ratings continues to rate India “BBB-” - the lowest investment grade, along with a “stable” outlook

In its overview S&P noted that...

  • Prime Minister Narendra Modi's coalition, led by the Bharatiya Janata Party has further consolidated power in state-level elections in 2017 and we expect it to make further gains.
  • One-off factors, such as demonetization and the imposition of a goods and services tax, have led to some quarterly cooling in India's high growth figures.
  • Nevertheless, the medium-term outlook for growth remains favorable, based on private consumption, an ambitious public infrastructure investment program, and a bank restructuring plan that should help revive investment.
  • Ratings are constrained by India's low wealth levels, measured by GDP per capita, which we estimate at close to $2000 in 2017, the lowest of all investment-grade sovereigns that we rate.
  • India's GDP growth rate is among the fastest of all investment-grade sovereigns, and we expect real GDP to average 7.6 percent over 2017-2020 (6.5 percent in per capita terms).
  • India's external debt, net of liquid public and financial sector external assets, will average a modest 8.4 percent of current account receipts over 2017-2020.
  • Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the large general government debt load and India's overall weak public finances continue to constrain the ratings.
  • In addition to expenditure demands, the country's fiscal challenges also reflect revenue underperformance compared with most peers at the rating level. India's general government revenue, at an estimated 22% of 2017 GDP, is low compared with peer sovereigns.
  • Although we expect central government to broadly succeed in controlling deficits at the federal level, we foresee that problems at the state level will add 3 percent on average to the consolidated general government deficits over the forecast horizon.

Responding to the status quo maintained by S&P, India’s Department of Economic Affairs Secretary Subhash Chandra Garg said in a media briefing that though “S&P chose to play little cautious, their assessment is in line with Moody's”.

“Think S&P will take more time to upgrade,” Garg added.

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