Retains India at lowest investment grade rating of BBB-; sees risks in low per capita GDP, high govt debt, sizeable fiscal deficit
Global rating agency Standard & Poor’s (S&P) on Friday retained its sovereign rating and outlook for India, refusing to join its peer Moody’s which raised the rating for the country by a notch in recognition of reforms undertaken in recent years. S&P has kept India’s sovereign rating unchanged at the lowest investment grade “BBB-” since January 2007, citing the country’s sizeable fiscal deficit, low per capita income and high general government debt levels. It also maintained the stable outlook for the country. “The ratings on India reflect the country’s strong GDP growth, sound external profile, and improving monetary credibility. India’s strong democratic institutions and its free press promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and relatively high general government debt stock, net of liquid assets,” S&P said in a statement.
Economic affairs secretary Subhash Garg said S&P chose to remain cautious, given a little uncertainty over the fiscal situation due to several ongoing structural reforms. But it won’t have any impact on the government’s borrowing costs, which are in any case much better than for many other countries with similar ratings. “S&P has spoken favourably of institutional reforms, growth figures and said 7.6% growth in times to come. They are almost in line with Moody’s but maybe they want some more time to upgrade,” Garg said. He also underplayed concern on rising fiscal deficit of states, as expressed by S&P, saying the states are “anyway constitutionally constrained not to exceed prescribed borrowing limits”.
Former economic affairs secretary Shaktikanta Das said S&P is several curves behind in rating India, and the country should be compared with only comparable nations. Niti Aayog vice-chairman Rajiv Kumar said: “I am quite surprised (that India’s rating was not upgraded) because S&P itself says that it expects robust economic growth in the next few years. When the economy grows, the debt to GDP ratio will decrease. Also, household savings is increasing.” Kumar said demonetisation has brought so much liquidity to the banks that there are resources available for investments without having to take recourse to external debt.
“So, rating agencies are not really now doing their job well. It’s external debt which is a cause of concern rather than total debt (around 68% now). India’s external debt is very low (around 20% at gross level), given that, where is the possibility of India defaulting on any debt servicing? It is quite ridiculous,” Kumar said. While a sharp rise in per capita GDP is unlikely in near future, given the sheer size of the population, income levels are expected to rise an impressive 6.5% over 2017-20, even according to S&P’s estimate. The agency has also recognised that India’s growth rate will remain the highest among all similarly-graded sovereigns (7.6%) over 2017-20 and its external debt, net of liquid public and financial sector external assets, will average a modest 8.4% of current account receipts during this period. The level of economy-wide external indebtedness is likely to remain contained throughout the forecast period, underpinned by an improved current account deficit, which is forecast to average 1.8% over 2017-2020, down from the 2.3% level in the 2011-2016 period, said the agency.
Analysts said the agency has been less than charitable, echoing the view expressed by chief economic adviser Arvind Subramanian in the last economic survey, when he referred to the “poor standards” by rating agencies in assessing the economic performance of India and China. India’s policymakers have been critical of the rating agencies methodology, which they thought deprived India of well-deserved upgrades based on its reforms zeal, good track record on servicing debts and macroeconomic fundamentals. Despite India’s strong growth trajectory and a commitment to fiscal discipline, India is deemed by these agencies as an outlier among emerging-market “peers” for its higher fiscal deficit and debt ratios, Economic Survey 2016-17 noted. Also, the survey said the inclusion of a slow-moving variable like per capita income has unfairly impeded the upgrade of low-to-middle-income countries. China’s ratings are way above India’s despite despite S&P recently cutting China’s long-term sovereign credit ratings by one notch to A+ from AA-.
Moody’s last week upgraded India’s sovereign rating by a notch to Baa2 after a long gap of nearly 14 years. S&P said the stable outlook reflects that, over the next two years, growth will remain strong, India will maintain its sound external accounts position, and fiscal deficits will remain broadly in line with our forecasts. Downward pressure on the ratings, however, could emerge if GDP growth disappoints, net general government deficits rose significantly or if the political will to maintain India’s reform agenda significantly lost momentum, it added. It said one-off factors such as demonetisation and the launch of the goods and services tax have led to some quarterly cooling in India’s high growth figures. “Nevertheless, the medium-term outlook for growth remains favourable, based on private consumption, an ambitious public infrastructure investment programme, and a bank restructuring plan that should help revive investment,” it said.
Ranen Banerjee, partner, public finance and economics, PwC India, said: “S&P’s review is taking into consideration a perspective over last three years while Moody’s one is over 13 years. This is clearly a conservative call wherein S&P would like to see the results of the reforms initiated before a ratings revision while Moody’s has taken the call based on the reforms