S&P affirms India ratings at BBB-, says upgrade unlikely this year or next

S&P Global Ratings has retained retained India’s sovereign ratings at ‘BBB-’ with a stable outlook but said it does not expect to change the rating for this year or next. “The stable outlook balances India’s sound external position and inclusive policymaking tradition against the vulnerabilities stemming from its low per capita income and weak public finances. The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts,” the rating agency said in a press release today. The rater has said a rating upgrade is possible if the government’s reforms markedly improve its general government fiscal outturns and also the level of net general government debt so that it falls below 60% of GDP. Meanwhile, a downward revision is likely if growth disappoints “perhaps as a result of stalling reforms” or if the new monetary council is not effective in achieving its targets or if the external liquidity position of the nation deteriorates more than we currently expect. [caption id=“attachment_3084400” align=“alignleft” width=“380”]  The rater has termed low per capita GDP as a key rating constraint[/caption] The agency has termed the low per capita GDP of the country estimated at US$1,700 in 2016 as a key rating constraint. Another constraint is the country’s debt load and overall weak public finances. “We believe domestic supply-side factors will increasingly bind economic performance, and the government has little ability to undertake countercyclical fiscal policy given its current debt burden,” it has said. According to the rating agency, the country’s fiscal challenges reflect both revenue underperformance and constraints on expenditure. “India’s general government revenue, at an estimated 21% of 2016 GDP, is low among rated sovereigns. Its expenditure constraints are mainly related to subsidies (about 2% of 2016 GDP) for food, energy, and fertilizers,” it has said. It does not expect the government to meet the revenue targets and also sees subsidy cuts getting delayed. The improvement in the country’s fiscal performance is possible as revenue rises on account of the implementation of GST. The government has set a target date of 1 April 2017 for the rollout of the tax reform. However, S&P has credited the NDA government for making progress in building consensus on passage of laws to address long-standing impediments to the country’s growth. “These include comprehensive tax reforms through the likely introduction in the first half of 2017 of a goods and services tax to replace complex and distortive indirect taxes,” the rater has said. Apart from GST, the other measures that S&P has mentioned include strengthening the business climate by simplifying regulations and improving contract enforcement and trade, boosting labor market flexibility, and reforming the energy sector. Also the country’s external position is considered a credit strength. In September, Moody’s had also described muted private investment and NPAs as speed-breakers amid slow reforms for a rating upgrade of the country. Moody’s has a ‘Baa3’ rating with a positive outlook. It too said evidence of policymakers working towards a faster fiscal consolidation, reducing the debt-GDP ratio and addressing infrastructure and monsoon volatility challenges will determine an upgrade, going forward.