Rating firm Standard and Poor’s (S&P) on Thursday affirmed India’s sovereign rating at ‘BBB-’ — the lowest investment grade rating — with stable outlook, saying the country’s GDP growth is likely to gradually recover over the next two to three years. However, S&P said India’s fiscal position remains precarious and fiscal deficits have exceeded the government’s plan.
Stating that India is experiencing “a cyclical, rather than a structural, economic slowdown”, S&P said India’s structural growth outperformance remains intact despite a notable deceleration in the country’s economy in recent quarters. Real GDP growth is, therefore, likely to gradually recover toward longer-term trend rates over the next two to three years, S&P said in a statement, adding that the economic growth rate is likely to improve to 6 per cent during 2020-21, 7 per cent in the next fiscal and 7.4 per cent thereafter.
S&P Global Ratings affirmed its ‘BBB-’ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings on India. The outlook on long-term rating is stable.
In November 2017, S&P kept its India rating unchanged at the lowest investment grade of BBB– with a stable outlook, citing a sizeable fiscal deficit, high general government debt and low per capita income. Moody’s had then raised India’s sovereign rating from the lowest investment grade of ‘Baa3’ to ‘Baa2’, and changed the outlook from stable to positive.
According to government data, India’s gross domestic product (GDP) growth is estimated to slow down to 5 per cent during 2019-20. S&P said the Indian economy has slowed measurably as real GDP growth fell to a more than six-year low of 4.5 per cent in the second quarter this fiscal. This was the fifth consecutive quarter of decline in year-on-year growth rate. “We expect India’s economy to continue to outperform peers at a similar level of income, despite a recent slowdown in real GDP growth. Supportive monetary, fiscal, and cyclical factors should support economic recovery, with real GDP growth averaging 7.1 per cent in fiscals 2020-2024,” it said.
S&P said the ratings on India reflect the country’s above-average real GDP growth, sound external profile and evolving monetary settings. The stable outlook reflects S&P’s expectation that India’s growth will be strong, the country will maintain its sound net external position, and its fiscal deficits will remain elevated but broadly in line with its forecasts over the next two years, it said.
India’s economic growth faces headwinds over the near term, including subdued private sector investment and sentiment, labour market difficulties, and soft demand conditions. However, S&P said the country’s long-term outperformance will remain intact.
GDP growth below forecast may lead to reassessment
S&P had refused to upgrade India when the economy was doing well and Moody’s upgraded the country’s rating in 2017. It has now cautioned that the downward pressure on the ratings could emerge if India’s GDP growth falls well below its forecasts, causing it to reassess view of trend growth, net general government deficits rise further from their currently elevated levels and political developments materially undermine economic reform momentum. S&P also said India’s fiscal position remains precarious, with elevated fiscal deficits and net government indebtedness.
It said upward pressure on the ratings could build if the government significantly curtails its fiscal deficits, resulting in lower net indebtedness at the general government level. Upside potential on the ratings could also increase if India’s external accounts strengthen substantially. Similarly, the downward pressure on the ratings could emerge if India’s GDP growth falls well below the agency’s forecasts, causing it to reassess view of trend growth, net general government deficits rise further from their currently elevated levels and political developments materially undermine economic reform momentum.
However, S&P said India’s fiscal position remains precarious, with elevated fiscal deficits and net government indebtedness. Fiscal deficits have exceeded the government’s plan, S&P said, adding it expects limited consolidation over the next few years.
S&P also noted that tighter lending conditions continue across the financial system, particularly in the public sector. This is reflected in a gradual decline in credit growth. In combination with ongoing liquidity concerns in the non-bank financial institution (NBFI) sector following the September 2018 default by IL&FS and subsequent relatively less impactful defaults, domestic credit conditions have been somewhat mixed, S&P said. “Weaker sentiment in the NBFI space may limit private consumption growth over the coming quarters,” it added.
The government’s August 2019 announcement that it will consolidate major public sector banks may also constrain credit growth over the next 12-24 months, it said.
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