S&P retains BBB- rating: No Christmas gift for Narendra Modi govt, but it doesn’t need to fight with US-rater

Standard and Poor’s (S&P), the US-rating agency, isn’t yet too impressed with Narendra Modi’s magic touch on the economy to offer a sovereign rating upgrade. But, the overall tone of the assessment from the agency indicates that Modi and his team at finance ministry do not need to lose cool with the rater for not awarding a rating upgrade. S&P statement is generous with statements that laud the improvement in the Indian economy and its future growth prospects. Having said, the fact that S&P has refused to do a Moody’s (another rating agency which last week upgraded India’s sovereign grade) will offer ammunition to Modi’s political rivals to dispute the merit and timing of the Moody’s upgrade ahead of the crucial state elections. S&P has retained its sovereign rating on India constant at BBB-, while keeping its outlook for India stable. S&P’s BBB- is just one grade above junk status and the Modi-government, after last week’s Moody’s upgrade on India rating, was perhaps expecting more. A rating upgrade from S&P too would have come as a double bonanaza for this government ahead of crucial Gujarat elections and would have silenced its critics who raised questions on the Moody’s upgrade. [caption id=“attachment_4226389” align=“alignleft” width=“380”]  File image of Prime Minister Narendra Modi. PTI.[/caption] Let’s look a bit closer into the S&P’s rating assessment. While Moody’s gifted Modi a rating upgrade citing structural reforms, the S&P has refused an upgrade highlighting the sizeable fiscal deficit, low per capita income and high government debt. In fact, one of the important things S&P has noted in its assessment as a hurdle to rating upgrade is India’s continuing low-income levels. India’s per capita income is the lowest ($2,000 in 2017), of all investment-grade sovereigns that S&P rates, the agency has noted. Having said, S&P has certainly taken note of the reform drive of the government and the growth prospects of the economy. “The stable outlook reflects our view that, over the next two years, growth will remain strong, India will maintain its sound external accounts position, and fiscal deficit will remain broadly in line with our forecasts,” S&P said. So, what does the Modi-government need to do to get an upgrade from S&P? “Upward pressure on the ratings could build if the government’s reforms markedly improve its net general government fiscal out-turns and so reduce the level of net general government debt. Upward pressure could also build if India’s external accounts strengthen significantly,” the agency has said. S&P has acknowledged both demonetisation and the GST (Goods and Services Tax) as one off factors that slowed the economy for two consecutive quarters. Nevertheless, the agency expects growth to be supported by the massive economic stimulus package announced by the government in the form of recapitalisation of public sector banks (PSBs) and spending in its infrastructure segment. On its way to a rating upgrade from S&P, Modi-government’s biggest challenge is to keep the government finances under check. The S&P has clearly highlighted the concerns arising out of large fiscal deficit and revenue shortage in Indian economy. “Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the large general government debt load and India’s overall weak public finances continue to constrain the ratings,” it said. Further, “the country’s fiscal challenges also reflect revenue underperformance compared with most peers at the rating level. India’s general government revenue, at an estimated 22 percent of 2017 GDP, is low compared with peer sovereigns.The message is clear. If a rating upgrade is the target, Modi government will have to forget any plans it may have to deviate from the fiscal consolidation roadmap, although it will significantly curtail its ability to push public expenditure going ahead, which is not a good news for a slowing economy. The Modi government immediately responded to the S&P rate action calling it “unfair”. Earlier also the govt has criticised the rating agency for not giving upgrade. For instance government’s chief economic advisor, Arvind Subramanian had expressed his unhappiness with rating agencies including S&P for not giving India a rating push saying that these agencies have poor standards. The S&P announcement on Friday would have disappointed Subramanian and his colleagues at the finance ministry. But, given that except the rating part, the overall tone of the S&P assessment acknowledges the improvement in the economy and Modi’s reform-intent, the government doesn’t need to pick a fight with S&P as it has done in the past.