5 reasons why S&P did not follow Moody’s in upgrading India’s credit rating

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Updated: November 24, 2017 6:33 PM

S&P today took a favourable view of Narendra Modi administration’s economic reforms undertaken and lauded India’s fiscal consolidation drive, but here are five reasons why it did not upgrade India on credit rating.

Here are five reasons why S&P did not upgrade India on credit rating.

Last week, it was a bonanza from Moody’s as the rating agency upgraded India’s sovereign rating to Baa2 from Baa3 after a long gap of 14 years, but as expected S&P did not follow suit and maintained status quo at BBB- and stable ‘outlook’, despite praising on may parameters.

While S&P has retained India’s sovereign rating, the global firm has pointed out certain parameters, which, if improved, would put upward pressure on the ratings. In its commentary, S&P took a favourable view of Narendra Modi administration’s economic reforms undertaken and lauded India’s fiscal consolidation drive but here are five reasons why it did not upgrade India on credit rating:

1. Demonetisation & GST: S&P said India’s confidence and GDP growth in the year 2017 were hit by the sudden demonetisation exercise and the introduction of the GST also led to some one-off teething problems that have dampened growth.

2. Low wealth level: S&P said India’s ratings are constrained by India’s low wealth levels, measured by GDP per capita, which we estimate at close to US$2,000 in 2017, the lowest of all investment-grade sovereigns that the rating agency rates.

3. Fiscal challenges: The rating agency said that the country’s fiscal challenges reflect the revenue underperformance as compared with most peers at the rating level.  India’s general government revenue, at an estimated 22% of 2017 GDP, is low as compared with peer sovereigns.

4. Weaker profitability: S&P estimate that public-sector banks will need a capital infusion of about US$30 billion to need capital to make large haircuts on loans to viable stressed projects and meet the rising requirement of Basel III capital norms. The rating agency said that the government did commit a capital infusion, but said that the public sector banks had weaker profitability.

5. Rajya Sabha number: The ruling BJP-led NDA coalition dominates the electoral scene, and has a clear majority in the Lok Sabha. However, it lacks a majority in the Rajya Sabha where the opposition has been able to stall some reform efforts. However, it said that the NDA could eventually lead to a majority in the Upper House.

Moody’s last week said India was poised for fast growth because of wide-ranging economic and institutional reforms by Narendra Modi’s government. S&P had in October 2017 said India needed to improve its fiscal position for a rating upgrade. It kept India’s sovereign rating unchanged at the lowest investment grade with a stable outlook.

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