DBRS upgrades India?s credit rating to stable

In what could lead to higher foreign investment into the country and lower the cost of overseas debt for Indian companies, global credit rating agency DBRS on Friday upgraded India?s long-term foreign and local currency debt rating outlook from negative to stable, according to a finance ministry statement. This is for the first time since DBRS started rating India in June 2007 that it has raised the outlook, on account of fiscal consolidation and return to pre-crisis growth levels. The agency has, though, cautioned against the high debt ratios, elevated interest outgo and high inflationary pressure in the country.

DBRS has upgraded its rating for India from BBB (low) Negative to Stable outlook. BBB signifies medium risk. A finance ministry official told FE that the upgrade would boost confidence of global investors in the Indian economy. He said this also corroborated the government?s commitment to fiscal consolidation. ?The government is aiming for even higher ratings, which reflect the country?s true fiscal position and trend growth,? he said.

India is rated by six credit rating agencies, including S&P, Moody?s, DBRS, Fitch, JCRA and Rating and Investment Information Inc. Earlier this week, Fitch had retained India?s sovereign rating at investment grade, stating it had ?robust growth prospect? and solid external financial condition. The agency affirmed long-term ?BBB-? rating for the country with stable outlook.

Last year, after some prodding from the finance ministry, S&P and Fitch Ratings upgraded their outlook on India from negative to stable. These agencies normally visit the finance ministry and Reserve Bank of India before making their assessments. The finance ministry has already started a structured interaction process with the agencies, while a committee in the ministry is studying ways to further improve the rating agencies? outlook on India.

A better rating helps in lowering the cost of international debt for Indian companies, while the Indian entities as well as the government could do with a lower spread on the debt papers sold to foreign investors. It also leads to higher equity allocation by FIIs towards a country.

?Estimates indicate that the general government deficit will decline from 8.3% of GDP in 2010-11 (8.7% of GDP excluding privatisation receipts) to 5.4% of GDP in 2014-15,? DBRS said. This effort, combined with reductions in subsides, changes in the tax code and privatisation of state assets, will reduce the net general government debt, estimated at about 75% of GDP in 2010-11, it added.

?Overall, India has adopted a more responsible medium-term fiscal policy and commitment to debt reduction, and this bodes well for the ratings,? DBRS said. ?The government is addressing the country?s infrastructure deficit by spending $514 billion, or 9% of GDP, on infrastructure between 2007 and 2012, and an additional $1 trillion from 2013 to 2017, half of which would come from the private sector.?

The agency said direct and indirect tax reforms would give a further boost to the Indian economy. ?A new direct tax code, which could improve tax efficiency, may be enacted in April 2012. Once introduced, a national identification card (UID) may, in the coming years, increase labour market formality, raise tax compliance and streamline subsidies and social security expenditure,? it said.

It added that the proposed Goods and Services Tax (GST) would help in streamlining the indirect taxation regime in the country. ?India?s fiscal and monetary policy response to the global credit crisis helped restore the economy to a path of higher growth. The economy has weathered the global credit crisis relatively well, and a strong private sector-led recovery has returned India?s growth rates to pre-crisis levels,? it said. DBRS, however, cautioned against the high debt ratio and the high inflationary pressure in the country. Though the net general government debt has come down to 66.5% of GDP in 2010-11, as per DBRS? definition, which includes transfer and subsidies, from 81.9% of GDP in 2005-06, this is still among the highest among low-to middle-income countries.