S&P rules out rating upgrade for India for two years

But says improvement in policymaking has raised the country's prospects for economic and fiscal performance

Standard & Poor’s (S&P) on Monday retained the lowest investment grade for India, dashing the government’s hope for a rating upgrade for at least for two years — this year and the next. The agency retained India’s rating at ‘BBB-’ with stable outlook and expressed the hope that the country’s economic growth would average at eight per cent during 2015-18.

“We are affirming our ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India,” S&P said.

BBB is the lowest investment grade rating and stable outlook reduces risk of possible sovereign rating downgrade.

“The outlook indicates that we do not expect to change our rating on India this year or the next based on our current set of forecasts,” S&P said in a statement.

S&P cautioned the rating might see a downgrade if the proposed monetary policy committee, to be headed by the Reserve Bank of India (RBI) governor, fails to deliver. It added the improvement in policy making has raised the country’s prospect for economic and fiscal performance.

Two other agencies — Moody’s and Fitch — too have the lowest investment grade for India’s economy.

The stable outlook, S&P said, “balances India’s sound external position and inclusive policymaking traditions against the vulnerabilities stemming from its low per capita income and weak public finances”.

S&P also cautioned that the downward pressure on the ratings could re-emerge if growth disappoints (perhaps as a result of stalling of 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, it added India’s ratings could improve if the government undertook reforms, which would improve the fiscal deficit and bring down net government debt to below 60 per cent of gross domestic product (GDP). “Stable outlook indicates that we do not believe India’s public finances will improve sufficiently this year or the next to warrant an upgrade, nor that its economic, external, or monetary profiles will slip enough to prompt a downgrade,” the agency said.

A rating constraint, S&P said, is India’s low GDP per capita, which it estimated at $1,700 in 2015.

According to S&P, India’s growth outperforms its peers and is picking up modestly. “Following India’s early 2015 re-basing of GDP, we expect GDP growth of 7.4 per cent in 2015 (six per cent in GDP per capita terms) and for it to average just under eight per cent over 2015-2018 (just under seven per cent in GDP per capita terms).

Justifying its decision to retain the rating, S&P said governing parties have made some progress in building a consensus on the passage of laws to address long-standing impediments to India’s growth. These include strengthening the business climate (through simplifying regulations and improving contract enforcement and trade), improving labour market flexibility, and reforming the energy sector.

“We also observe some progress in comprehensive tax reforms through the likely introduction of a goods and services tax to replace complex and distorting indirect taxes.

CARE pares GDP growth forecast

Rating agency CARE has downgraded India’s growth forecast from 7.8- 8 per cent to 7.5-7.6 per cent in FY16. In its Revised Prognosis for Indian Economy report, the rating agency has red-flagged a number of issues that will have a negative bearing on Indian GDP growth. Among the reasons CARE expects Indian growth to be pulled down in FY16 are global growth slowdown, Chinese devaluation of the yuan, 16 per cent deficient monsoon, US Federal Reserve’s impending rate hike and low capital utilisation.