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S&P rates India at “BBB-“, says upgrade unlikely this year or next

The rater has said a rating upgrade is possible if the government's reforms markedly improve its general government fiscal outturns and also the level of net general government debt so that it falls below 60% of GDP.
Standard & Poor's headquarters in the financial district of New York on August 6, 2011. The United States' credit rating was cut for the first time ever August 5 when Standard and Poor's lowered it from triple-A to AA+, citing the country's looming deficit burden and weak policy-making process. AFP PHOTO/Stan HONDA

Assuring of a stable outlook, Standard & Poor (S&P) Global ratings has retained India’s sovereign ratings at ‘BBB-‘, without any plans to change it anytime soon.

“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. 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,” the rating agency said in a press release.

Reportedly, the rater has said a rating upgrade is possible if the government’s reforms markedly improve its general government fiscal outturns and also the level of net general government debt so that it falls below 60% of GDP.

However, not to forget the downward revision possible of growth disappoints “perhaps as a result of stalling reforms” or if 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.

According to S&P, the key rating constraint is low per capita GDP of the country which is estimated at US$1,700 in 2016. Another would be country’s debt load and overall weak public finances.

“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 has said.

It has been reported that the agency believes that the country’s fiscal challenges reflect both revenue underperformance and constraints on expenditure. “India’s general
government revenue, at an estimated 21% of 2016 GDP, is low among rated
sovereigns. Its expenditure constraints are mainly related to subsidies (about 2% of 2016 GDP) for food, energy, and fertilizers,” it added.

S&P is not expecting the government to meet the revenue targets and also sees subsidy cuts getting delayed.

It has been highlighted that the improvement in the country’s fiscal performance is possible as revenue rises on account of the implementation of GST. The target date for the rollout of GST reform is April 1, 2017.

Interestingly, S&P has credited the NDA government for making progress in building consensus on 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 to replace complex and
distortive indirect taxes,” the rater has said.

The other measures which S&P has appreciated are strengthening the business climate by simplifying regulations and improving contract enforcement and trade, boosting labor market flexibility, and reforming the energy sector. The credit strength, according to the rating agency, is India’s external position.

Earlier in September, Moody’s also found muted private investment and NPAs as speed-breakers while slow reforms occur for a rating upgrade of the country. Moody’s has a ‘Baa3’ rating with a positive outlook.

Moody’s also found that evidence of policymakers working towards a faster fiscal consolidation, reducing the debt-GDP ratio and addressing infrastructure and monsoon volatility challenges will be a key factor in determining an upgrade, going forward.

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