Per capita income too low: Why S&P said no India upgrade for 2 years

Public finances are set to remain key rating constraints for some time, it said

Standard & Poor's affirmed India's sovereign ratings on Wednesday, welcoming its policy stability and improved monetary credibility, but ruled out any upgrade this year or in 2017 because of weak public finances and low per capita income.

The stance comes despite a push for a ratings upgrade from officials, who have argued they have kept the fiscal deficit in check and passed major economic reforms including a revamp of a goods and services tax (GST).

But S&P stuck to its rating of "BBB-minus" with a "stable" outlook, saying it would need to see more efforts to lower net general government debt level to below 60 percent of gross domestic product.

"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," S&P said in a statement.

"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."

Govt slams S&P rating

The government slammed S&P's statement saying there was a 'disconnect' between rating agencies' views and investor perception on India.

A senior government official expressed disappointment at the decision, saying it did not reflect efforts over the past two years under Prime Minister Narendra Modi to improve economic growth.

India is introducing the GST and stuck to an ambitious fiscal deficit target of 3.5 percent of GDP for the year ending in March.

"It's a question that calls for an introspection among those who do the rating," Shaktikanta Das, economic affairs secretary, told reporters.

The US-based ratings agency maintained the lowest investment grade rating of 'BBB-' with a 'stable' outlook 

S&P maintained the lowest investment grade citing the country's sound external profile and improved monetary credibility. While it advocated more efforts to lower government debt to below 60 per cent of the GDP, it did not expect revenues to raise enough to meaningfully lower the deficit over the medium term.

The agency also expressed concern the government could delay subsidy cuts, while noting the banking sector would likely need capital infusions of about $45 billion by 2019, or 2 percent of GDP, to meet global Basel III capital norms.

"Overall, we believe public finances are set to remain key rating constraints for some time," S&P said.

Even Moody's had said a rating upgrade is not possible

In September, Moody’s, another ratings agency had said that a ratings upgrade for India would not be possible before the next couple of years. This was just ahead of the agency’s representatives meeting finance ministry officials.

Policymakers were miffed at Moody’s making such statements even before meeting them and Das told the representatives that he had serious concerns regarding the agency’s methodology. He told them that, under the circumstances, the meeting was “completely irrelevant and superfluous”.

S&P welcomes govt's efforts on growth front

Still, S&P welcomed government efforts to "address longstanding impediments to growth", including the passage of GST and other reforms such as in labour and the energy sector.

It also welcomed the Reserve Bank of India's action to reduce inflation and enhance its "monetary policy credibility", including through the introduction of a committee to set interest rates and improve communication.

Both S&P and Fitch Ratings rate India "BBB-minus", the lowest investment-grade rating, with a "stable" outlook. Moody's Investors Service rates India at an equivalent "Baa3", but with a "positive" outlook.

With inputs from Agencies