Days ahead of the Union Budget, global rating agency Standard & Poor’s today warned that India’s weak fiscal and debt indicators, coupled with the low income levels, “constrain” the sovereign rating.
“India’s low income levels and weak fiscal and debt indicators constrain the country’s credit profile,” S&P said in a note.
Although it said that last year’s election results have created a conducive environment for reforms with political stability, the agency termed the “governance effectiveness” as a “neutral credit factor”.
S&P said higher growth in real per capita GDP, stronger fiscal/debt metrics and an improved external position as well as monetary policy setting are essential to enhance the current ‘BBB’ rating with a stable outlook.
“The government’s ability to fulfill its promises on key reforms will therefore be critical,” S&P credit analyst Agost Benard said.
The government’s fiscal consolidation plan, which entails a gradual lowering of the fiscal deficit over the next three years, will ease the debt and interest burden but “improvements in India’s weak fiscal balance sheet are likely to be gradual,” he added.
The government has promised to keep the deficit at 4.1 per cent for FY’15 and is targeting to bring it down to 3.6 per cent in FY’16 and push it further to 3 per cent by FY’17.
After comparing India with other BBB-rated peers like Brazil, Colombia, Indonesia, the Philippines, South Africa and Uruguay, the agency said the average income in India is “significantly low” and the “government is also more heavily indebted”.
The stronger balance sheet on the external front only “partly offsets” these weaknesses, it added.
“The country’s stronger external balance sheet only partly offsets these weaknesses,” it said.
Flexibility on the monetary policy front, where RBI has shifted to rate cuts, is “moderately supportive” of the sovereign’s credit-worthiness, it said.
Factors such as high savings and investment rates, together with favourable demographics, where 87 per cent of the population is aged 54 or below, put the country in good stead to achieve fast growth.
Growth could touch the 7 per cent mark by 2017, but a projected per capital income of USD 2,404 in 2017 will still leave the country’s wealth at about one-third of the average of similarly rated countries, it said.
Commenting on strong performance on the external front, where some analysts are saying the current account could be in a surplus, the agency said this is unlikely to lead to an upward rating revision.
“We believe any further improvement in external liquidity or balance sheet is unlikely to lead to a higher credit rating,” it said.
The agency last year upgraded its outlook on the country to stable from negative. It had earlier voiced concerns on the lack of growth, a sense of “policy paralysis” and the high fiscal deficit, and also threatened to downgrade the rating to junk.