Hopeful of efficacy of ‘ongoing reforms’, forecasts Indian economy and fiscal position will stabilise and start to recover from next fiscal
Global rating agency Standard & Poor’s (S&P) on Wednesday affirmed its sovereign rating for India at ‘BBB-‘, the lowest investment grade, and retained the ‘stable’ outlook, with commentary reflecting its continued confidence in the country’s long-term growth potential, notwithstanding the exacerbated fiscal settings.
The ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers, S&P wrote, in apparent contrast to Moody’s Investors Services’ recent citing of the challenges faced by India’s policy-makers in mitigating the risks of a “sustained period of relatively low growth”.
S&P predicted India’s GDP to shrink 5% in FY21, but said growth could recover rather smartly on the low base to 8.5% in FY22. The general government’s fiscal deficit could spike to 11% of the GDP this fiscal, given the additional expenditure measures to mitigate the impact of the Covid-19 crisis and a much weaker revenue outlook, it prognosticated, adding that, the deficit might decline meaningfully next year to well below 10% of the GDP.
On June 1, Moody’s trimmed India’s sovereign rating by a notch to the lowest investment grade of Baa-3 and retained the “negative” outlook, which it said reflected “dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody’s currently projects”. S&P wrote: “We are affirming our ‘BBB-‘ long-term and ‘A-3’ short-term foreign and local currency sovereign credit ratings on India… The stable outlook reflects our view that India’s economy, and fiscal position, will stabilise and begin to recover from 2021 onwards”.
Notably, post-the recent rating actions by S&P and Moody’s, both agencies and peer Fitch Ratings keep India at their respective lowest investment grades; while Moody’s outlook for India is ‘negative’, the other two have ‘stable’ outlook on the country. Moody’s was the only agency to revise up India’s sovereign rating for the first time in over a decade in November 2017, while S&P and Fitch haven’t yet given the country an upgrade. Moody’s then cited expectations of “continued progress on economic and institutional reforms” which could enhance the country’s growth potential. Later, in November last year, it revised down its outlook for the country to negative.
Recently, Thomas Rookmaaker, director (sovereign ratings) at Fitch Ratings, told FE: “The projected medium-term fiscal path after the pandemic will play an important role in our assessment of India’s sovereign rating. We expect government debt to rise in FY21 and FY22, but the government may tighten fiscal policy again once the pandemic is under control.” Rookmaaker had also said Fitch would factor in the fiscal buffers that sovereigns had going into the crisis. “In India’s case the fiscal buffers are small, but the external finances are resilient relative to many of its peers,” he said.
S&P said: “We forecast overall net general government debt will rise to more than 80% of GDP this year, from just over 70% of GDP in fiscal 2020 (FY20). We include the government’s bank-recapitalization bonds as liabilities on its balance sheet.” India’s debt-to-GDP ratio, according to Moody’s, rose to 72.3% in FY20, against 69.9% a year before.
India’s overall external position remains a credit strength, largely owing to the economy’s limited external indebtedness, according to S&P. It expected India’s current account deficit to decline modestly to 1.1% of GDP this fiscal from 1.2% previous year, and to continue to improve till FY23, largely owing to its improving terms of trade on weaker oil prices. It projected India to narrow net external debt position, a measure of the economy’s net foreign indebtedness, will average less than 10% of current account receipts through FY24. On inflation front, it expected the Reserve bank of India to continue to achieve its inflation targets.
On the upside scenario, S&P said it could raise the ratings on India if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level. On the other hand, downside pressure on the ratings could emerge over the next one to two years “if: (1) India’s GDP growth fails to meaningfully recover from 2021 onwards, and its trend growth rate falls towards the average of its peers; (2) net general government deficits materially exceed our forecasts, signifying a weakening of India’s institutional capacity to maintain sustainable public finances”.
“The strong mandate for India’s Bharatiya Janata Party-led coalition government in the 2019 parliamentary elections should provide sufficient political capital to push further reforms, but execution remains key,” S&P said. It, however, noted that prior to the onset of the pandemic, India’s GDP growth rate had already slowed measurably. “Existing vulnerabilities including a weak financial sector, rigid labour markets, and consistently weak private investment could hamper India’s recovery if they are not actively addressed,” the agency warned.