Standard and Poor's upgrades outlook for India to 'stable' from 'negative'

Written by Agencies | Updated: Sep 27 2014, 03:32am hrs
Standard and poorsS&P had cut India's rating to "negative" in April 2012. (PTI)
Standard and Poor's (S&P's) today improved India's outlook to stable from negative saying the new political formation under PM Narendra Modi at the Centre has the capacity to push reforms and put the country back on high growth trajectory.

"We could raise the rating if the economy reverts to a real per capita GDP trend growth of 5.5 per cent per year and fiscal, external, or inflation metrics improve," the global rating agency said.

The revision in outlook comes ahead of Prime Minister Narendra Modi high profile visit to the US, which among things is aimed at procuring investments. Modi is scheduled to meet top US corporates.

The stable outlook, it said, reflects the agency's expectation that the newly elected government will be able to implement reforms that spur growth, which in turn improves fiscal performance.

S&P has affirmed the 'BBB-/A-3' sovereign credit rating on India and revised the outlook on the long-term rating to stable from negative. Stable outlook reduces risk of any possible sovereign rating downgrade.

"The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the RBI to carry out effective monetary policy," it added.

S&P also cautioned that it could lower the rating in case the government's structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve.

After taking over as Prime Minister in May, Modi has launched host of initiatives, including 'Make in India' campaign to ease business environment and fetch FDI.

Commenting on the new outlook, Finance Secretary Arvind Mayaram said: "We are satisfied that the credit rating agency has acknowledged the steps that government has taken to improve the economy and specially bring the investment climate back and therefore the growth cycle back."

When asked that the rating has not been upgraded, he said the government is neither disappointed nor sorrowful.

He said rating agencies have their own methodology and sometimes there "may be divergence with the way we assess the economy".

In 2012, S&P had lowered India's credit outlook from stable to negative.

It further said the ratings on India reflect the country's strong external profile, combined with its democratic institutions and free press, both of which underpin policy stability and predictability.

"These strengths are balanced against the vulnerabilities stemming from the country's low per capita income and weak public finances," it added.

The rating agency further said India's external position is a key credit strength. The country has relatively little external debt and a much improved external liquidity position.

"We project that, at the fiscal year end of March 31, 2015, external debt net of external assets will be 6 per cent of current account receipts (CARs)," it said.

It said the government's actions will likely add momentum to the incipient cyclical upswing evident in the economy.

"We project real per capita GDP growth to reach 5 per cent by next year, and per capita GDP to surpass USD 2,000 by 2017," the S&P statement said.

S&P expects the new administration to adhere to its stated fiscal consolidation programme, even though "we acknowledge that planned revenues may not fully materialise and subsidy cuts may be delayed".

It expects that improved fiscal performance in the medium term primarily from revenue-side improvements brought about by the planned introduction of a national goods and services tax (GST) and administrative efforts to expand the tax base.

S&P projects net general government debt to decline to below 60 per cent of GDP by the year ending March 2018, and with it, general government interest rate expense to just under 20 per cent of revenues.

"A faster pace of deficit and debt reduction is unlikely in our view. Hence, we believe fiscal and debt metrics are set to remain key rating constraints for some time," it added.

On Current Account Deficit (CAD), S&P expects it to widen from the current low of 1.8 per cent of GDP (as of March 2014) as investment picks up, gross external financing needs are likely to remain at or below the sum of CARs plus usable reserves in the next two to three years.

The benchmark Sensex today rose by 157.96 points, or 0.60 per cent, to close at 26,626.32.

COMMENTARY

SOUMYA KANTI GHOSH, CHIEF ECONOMIC ADVISER, STATE BANK OF INDIA, MUMBAI

"S&P's upgrade of India outlook should bore well for foreign inflows and borrowing cost will also come down for companies. We expect the fiscal deficit to fall below 4 percent of GDP in this fiscal year and further below 3 percent in 2016. If that happens, then don't be surprised to see India's sovereign rating being upgraded by S&P."

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE

"The S&P rating outlook revision is an affirmation of the economy's growth prospects, macro stability and lower vulnerability of external balances. The government, backed by a decisive mandate, and a credible inflation-fighting central bank have provided a positive backstop for the economy and is likely to boost investor confidence in the months ahead. Improved foreign reserves stock and a comfortable balance of payments position act as additional buffers against external volatility.

While some quarters will make a case for a rating upgrade next, the latter is still some distance away as some clarity is still required on the fiscal consolidation efforts, take-off pace of the reform agenda and sustained pick-up in growth in a controlled inflationary environment."

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI:

"The negative outlook determined probability of a downgrade. So, to that extent, an upgrade on the outlook to stable increases chances of a rating upgrade. Today, the political set up is looking more stable, inflation is coming down, external sector has corrected in a significant way and you can have the benefits on the fisc due to falling oil and commodity prices. But it is still a long way for a rating upgrade for India unless there is absolute clarity on the fiscal deficit."

SHAKTI SATAPATHY, SENIOR FIXED INCOME STRATEGIST, AK CAPITAL SERVICES LTD, MUMBAI

"The revision in outlook is undoubtedly a welcome step and due acknowledgement of the new government's effort in proactively restructuring the fiscal front and investment sustainability. The recent measures taken by the government clearly reflect an intent in reviving the economy into shape. Also, the traction and strategy in attracting foreign inflows seems sustainable. However, the near-term concern would revolve on supply side food inflation front."

SOUMYAJIT NIYOGI, ANALYST, INTEREST RATE & EQUITY, SBI DFHI

"We strongly believe that an outlook upgrade from S&P was warranted at this juncture. It was only a matter of time before it came, since the other two major agencies already have a stable outlook on India. The most critical aspect of S&P comments is that it stresses the changes in political scenario with the coming of the Narendra Modi regime. On the government bonds front, foreign investors who were earlier cautious about India will now be more willing to invest, since there is greater margin of safety as far as credit worthiness is concerned. Of course, this is only possible if the government increases debt limits for FIIs. I think we are getting closer to an India sovereign rating upgrade, although this might still take 1-2 years."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"This is the first step towards improving the rating. At the time India had its election, S&P had said they would watch for structural reforms. And the fact they have already revised the outlook means whatever measures have been taken in the budget as well as subsequently, S&P thinks those are going to be growth positive.

The outlook change has come also because of the kind of stability India has acquired on the external sector front. On the whole, I feel whatever Thursday's (launch of) 'Make in India' (initiative) and the kind of steps they have taken to improve administrative machinery, decision-making processes, all that has been factored in."

KILLOL PANDYA, SENIOR FUND MANAGER - DEBT AT LIC NOMURA ASSET MANAGEMENT, MUMBAI

"Such action has come after a long time and underlines the green shoots in the economy. It shows India is on the mend. It's a big boost for sentiment. Stocks will appreciate and by proxy currency too. Although not much will happen in the bond market at ground level. This goes on to show that the Narendra Modi-led government has instilled a lot of confidence among foreign investors and stakeholders."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The upgrade is more of a reinforcement of improving macro-economic fundamentals and macro-economic stability. I think it's more of reiteration what we have seen already happen over the last three months. It just adds to the confidence because capital flows have anyway been strong and robust over the last few months.

"For a ratings upgrade, we need to see a credible pick up in investment cycle, while the enablers are getting created, larger confidence will emanate once all these translate into numbers. And that investment-led growth begins to anchor inflation expectations."

U.R. BHAT, MANAGING DIRECTOR, DALTON CAPITAL ADVISORS, MUMBAI

"S&P's action is positive for markets. This just goes on to show that cyclical recovery in Asia's third-largest economy is on the right path. India's macro finances are getting into good shape. There are expectations of buoyancy in government's fiscal health. India's fiscal deficit targets now look more achievable."