Standard & Poor’s (S&P) on Wednesday said an upgrade of India’s sovereign rating will need to wait for one to two years mainly due to the country’s “weak public finances”, prompting policymakers here to react strongly against the rating agency’s alleged failure to give due consideration to the reforms being undertaken by the government. S&P’s decision to retain India’s rating at the lowest investment grade (BBB-) with stable outlook followed Moody’s commentary in September suggesting India’s rating upgrade may take at least one to two years.
In July, another global rating agency, Fitch, also retained its India rating at BBB- with stable outlook. The current India ratings of all three global agencies are a just a notch above junk grade.
Urging rating agencies to do some introspection, economic affairs secretary Shaktikanta Das said: “If the rating has not been improved, it’s a matter which doesn’t bother us so much… Global investors feel India is highly under-rated.” He added: “So far as the government is concerned, we have been saying repeatedly that we will continue to adhere to the path of economic reforms.”
With the clutch of reforms undertaken by the Narendra Modi government including the easing of foreign investment regulations and use of the Aadhaar platform for delivery of subsidies and the ones that will be put in place soon (like the goods and services tax and an efficient insolvency regime), the government strongly feels the agencies must consider improving their ratings and outlooks for the country.
Of course, S&P has praised the government’s initiatives in passing the GST Bill, the progress made by the country in the areas of ease of doing business, labour market flexibility and energy sector reforms. However, weak public finance has been cited as one of the factors hindering a ratings upgrade. The combined fiscal deficit of the Centre and states averaged 7% of gross domestic product (GDP) in the past five years. S&P singled out inadequacy of capitalisation of stressed public sector banks. The government committed only $11 billion to these banks by 2019 against a required amount of $45 billion, it noted. “The stable outlook balances India’s sound external position and inclusive policy-making tradition against the vulnerabilities stemming from its low per capita income and weak public finances. The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts,” S&P said.
The upward pressure on the credit ratings could emerge if the government reforms markedly improve India’s fiscal performance and pushes down the level of net general government debt below 60% of GDP, S&P said. Currently, government debt amounts to about 69% of GDP.
It cautioned that downward pressure on the rating could re-emerge if economic growth disappoints (perhaps as a result of stalling reforms) or the interest rate-setting monetary policy committee is not effective in achieving its targets; or the external liquidity position deteriorates more than expected. S&P projected India’s economy to grow 7.9% in FY17 with current account deficit at 1.4% of GDP. It also said that RBI will likely meet retail inflation target of 5% by March 2017.