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S&P sticks to India rating; no change this year or next

Low per capita income, debt load and weak public finances are constraints

By: ENS Economic Bureau | Mumbai |
Updated: November 3, 2016 8:07:15 pm

Ignoring the push by the government for a rating upgrade, US rating agency Standard & Poor’s on Wednesday stuck to its rating of “BBB-minus” with a “stable” outlook, praising India’s “sound external position and inclusive policymaking tradition” and pointing out “the vulnerabilities stemming from its low per capita income and weak public finances”. Significantly, S&P also ruled out a change in “rating on India this year or next”, based on its current set of forecasts.

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“Upward pressure on the ratings could build if the government’s reforms markedly improve its general government fiscal outturns and, with them, the level of net general government debt so that it falls below 60 per cent of GDP,” S&P said. “Downward pressure on the ratings could reemerge if growth disappoints (perhaps as a result of stalling reforms), if, contrary to our expectations, 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.”

However, S&P noted that India’s governing parties have made progress in building consensus on a 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 (GST) to replace complex and distortive indirect taxes. Other measures include strengthening the business climate (such as through simplifying regulations and improving contract enforcement and trade), boosting labor market flexibility, and reforming the energy sector,” it said.

“We believe these measures, supported by India’s well-entrenched democracy, will promote greater economic flexibility and help redress public finances over time,” it said. Soumya Kanti Ghosh, chief economic adviser, SBI, said, “Though disappointing, the S&P move was expected as the rating agencies show differential treatment when it comes to developed and developing countries. The agency has praised the Government’s initiatives in passing the GST Bill coupled with the progress made by the country in the areas of ease of doing business, labour market flexibility and the energy sector reforms. However, weak public finance has been cited as one of the constraints hindering ratings upgrade.” S&P has affirmed its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.

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“A rating constraint is India’s low GDP per capita, which we estimate at $1,700 in 2016. That said, India’s growth outperforms its peers and is picking up modestly. We expect GDP growth of 7.9 per cent in 2016 (6.6 per cent in per capita GDP) and 8 per cent on average over 2016-2018 (6.7 per cent in per capita GDP). 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 said.

Rating firms need to introspect; investors feel otherwise, says govt

The finance ministry on Wednesday said rating agencies should introspect for not upgrading India’s sovereign rating despite a slew of reforms. The rating agencies need to do some “introspection” as investors globally feel the country is “under-rated”, Department of Economic Affairs secretary Shaktikanta Das, speaking to reporters after S&P Global Ratings ruled out an upgrade for India for next 2 years.

“If the rating has not been improved, it’s a matter which doesn’t bother us so much. It’s a question which calls for an introspection among those who do the rating,” Das said. He said global investors feel India is highly “under-rated”. A higher rating by agencies helps attract greater foreign investment in the country.

“There is a disconnect, therefore, between what the investors are thinking of, what they have in their mind, and (what) the rating agencies are concluding. I think somewhere there is a disconnect,” he said, adding that the government has taken a series of economic reforms in the last two years to boost growth momentum.

Das said the rating agency has given emphasis on India’s sound external position, inclusive economic reform agenda. It also recognises that India is continuing structural reforms, and the ability of system to retain inflation below 5 per cent. The government will continue to adhere to the path of economic reforms as well as various policy initiatives and it’s for the rating agencies to take their own view, he added. “The report of S&P says all the right things and everything that has been done about India … Now, with all these if the rating has not been improved, it is a matter which does not bother us so much but it’s a question which calls for an introspection among those who do the rating,” Das said. He banking sector issues highlighted by S&P – such as low profitability especially among state-owned banks and their rising capital needs – continuously engage the attention of the government.”

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