New Delhi - Rating agency Standard & Poor's (S&P) on November 24 refused to upgrade India's sovereign ratings maintaining status quo at BBB- with stable outlook, a development that comes a week after Moody's did an upgrade.
"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 deficits will remain broadly in line with our forecasts," the global agency said.
It said 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.
However, it cautioned that there could be downward pressure on the ratings if GDP growth disappoints, causing us to reassess our view of trend growth; if net general government deficits rose significantly; or if the political will to maintain India's reform agenda significantly lost momentum.
"Ratings are constrained by India's low wealth levels, measured by GDP per capita, which we estimate at close to $2,000 in 2017, the lowest of all investment-grade sovereigns that we rate. That said, India's GDP growth rate is among the fastest of all investment-grade sovereigns, and we expect real GDP to average 7.6 per cent over 2017-2020 (6.5% in per capita terms)," the agency said.
Reacting to the ratings, the Finance Ministry tweeted: "Ratings on India reflect country's strong GDP growth, sound external profile and improving monetary credibility...These strengths r balanced against vulnerabilities stemming from country's low per capita income & relatively high general gov debt stock, net of liquid assets."
Subhash Chandra Garg, Secretary in the Department of Economic Affairs, expressed relief that the rating agency has not downgraded India.
"There is no question of going back to the old position. Even before, the market used to view India in a better position while compared to the ratings reactions. If you look at our borrowing cost, it was better in terms of ratings even before. Moody's reaction gave more confidence to the markets. S&P has not downgraded, S&P has also confirmed the investment grade. So I don't see that there will be any opposite influence in our costs or otherwise because of the ratings," he told the media."
"These are two independent agencies. They would not think exactly alike. Their judgment and assessments would always be somewhat different than each other," Garg added.
Boosting investor sentiments, US credit rating agency Moody's on November 17 upgraded India's sovereign rating to Baa2 from its lowest investment grade of Baa3 after 13 years, a development Finance Minister Arun Jaitley said was "an extremely encouraging" global recognition of the structural reforms of last three years". India Inc too lauded it.
The S&P said the ratings on India reflect the country's strong GDP growth, sound external profile, and improving monetary credibility. India's strong democratic institutions and its free press promote policy stability and compromise, and also underpin the ratings.
"These strengths are balanced against vulnerabilities stemming from the country's low per capita income and relatively high general government debt stock, net of liquid assets."
The agency noted that the BJP-led coalition has also managed to pass a number of reforms to address long-standing impediments to the country's growth. These include comprehensive tax reforms through the introduction, on July 1, 2017, of a Goods and Services Tax (GST).
Other measures include a Bankruptcy Code and nonperforming loan resolution framework; a plan to recapitalize state-owned banks; a plan to strengthen the business climate by simplifying regulations and improving contract enforcement and trade; and reforms to the energy sector.
However, confidence and GDP growth in 2017 appear to have been hit by the sudden demonetization exercise in late 2016.
The July 1, 2017 introduction of the GST, which combines the central, state, and local-level indirect taxes into one, has also led to some one-off teething problems that have dampened growth.
"Nevertheless, in the medium term, we anticipate that growth will be supported by the planned recapitalisation of state-owned banks, which is likely to spur new lending within the economy. Public-sector-led infrastructure investment, notably in the road sector, will also stimulate economic activity, while private consumption will remain robust. The removal of barriers to domestic trade tied to the imposition of GST should also support GDP growth."
The rating agency said the ruling party continues to consolidate its power at the state level and, despite obstacles to the implementation of reforms, strong growth is likely to continue.
"Nevertheless, the medium-term outlook for growth remains favourable, based on private consumption, an ambitious public infrastructure investment programme, and a bank restructuring plan that should help revive investment," the agency stated.