Despite India pitching for an upgrade recently, global rating firm Standard and Poor’s on Monday retained the country’s ‘BBB-‘ sovereign credit rating with a stable outlook, citing low per capita income and weak government
The upward pressure on the ratings could build if the government’s reforms markedly improve its general government fiscal outturns and with them the level of net general government debt so that it falls below 60% of GDP from 70%, S&P said in a statement.
“Downward pressure on the ratings could reemerge if growth disappoints (perhaps as a result of a stalling of reforms), if, contrary to our expectations, the new monetary council is not effective in achieving its targets, or if the external liquidity position of the nation deteriorates more than we currently expect,” it said.
S&P’s ‘BBB-‘ signify the lowest investment grade rating, just above junk grade. A rating constraint is India’s low GDP per capita, which S&P estimated at $1,700 in 2015.
“Following India’s early 2015 rebasing of GDP, we expect GDP growth of 7.4% in 2015 (6% in GDP per capita terms) and for it to average just under 8% over 2015-2018 (just under 7% in GDP per capita terms),” it said. It believed that domestic supply-side factors will increasingly bind economic performance, and that the government has little ability to undertake counter cyclical fiscal policy given its current government debt load.
India’s fiscal challenges reflect both revenue under performance (at an estimated 19.5% of GDP in 2015, India’s general government revenues are low among rated sovereigns) and constraints on expenditure (mainly related to subsidies for food, energy, and fertilizers; equivalent to about 2% of GDP in 2015), it said. Although we expect the new administration to pursue its stated fiscal consolidation program, it foresees that planned revenues might not fully materialise and subsidy cuts may be delayed.
India’s high fiscal deficits have led to the accumulation of sizable general government borrowings and servicing costs (close to 70% of GDP, net of liquid assets, and over a quarter of general government revenues, respectively).
Other challenges India faces include public sector bank’s high exposure to the government and losses of state electricity boards. State-run banks (despite having three quarters of banking system assets) are less profitable than private sector. It cautioned that government may have to increase the fund infusion if the banks are not able to secure capital from market.
Steps such as strengthening the business climate, improving labour market flexibility, and reforming the energy sector and proposed goods and service tax, would help redress public finances over time. Thanks to non-debt inflows, it expected India’s current account deficit to be at a comfortable position at 1.4% of GDP in 2015.
The rating firm also noted the plan to set up a monetary policy committee in the RBI to set policy interest rates to achieve flexible inflation targeting.