S&P welcomes reforms but doesn’t upgrade, cites low income and high Govt debt

S&P also observed that ratings on India reflect the country’s strong GDP growth, sound external profile and improving monetary credibility.

A week after Moody’s Investors Service upgraded India’s sovereign ratings, global agency Standard & Poor’s (S&P) was somewhat cautious in its assessment and kept India’s sovereign credit ratings unchanged at “BBB-” with a “stable” outlook.

While S&P said it is optimistic about India’s medium-term growth prospects, it has, however, argued that sizable fiscal deficits, a high net general government debt burden, and low per capita income detract from an improvement in the country’s credit profile.

While the government initiated a number of reforms including the Goods and Services Tax (GST), Bankruptcy Code and non-performing loan resolution framework, the S&P said, demonetization and initial problems with GST roll out have “dampened growth”.

“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,” S&P said.

A sovereign ratings is reflective of a country’s risk profile and a key barometer used by international investors, especially in the fixed income market, for making their investment decisions. Short-term foreign and local currency sovereign credit ratings has also been kept unchanged at the lowest investment grade level at A-3 with a stable outlook.

While Moody’s gave a higher weight to the “wide-ranging program of economic and institutional reforms” in its assessment, S&P, while acknowledging these reforms, stuck to the same rating and outlook mainly on concerns relating to the trajectory of fiscal consolidation and lowest level of per capita wealth.

“Given the planned ramp-up in public-sector-led infrastructure investment and the persistent deficits, especially at the state level, fiscal consolidation will remain difficult,” S&P said. Fiscal consolidation at the Central government and state state level remains slow, even as India’s external position is a strength, it said.

Even as low wealth levels constrain India’s ratings, the agency expects GDP to grow at 7.6 per cent during 2017-20 period. “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,” it said.

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But despite two quarters of weaker-than-expected growth, India’s economy is forecast to grow robustly in 2018-2020 and foreign exchange reserves will continue to rise, it said.

Economic Affairs Secretary Subhash Chandra Garg, in response to the ratings, said S&P has been “a little cautious” and that it is “possibly waiting for some time” to upgrade. “They have said everything which Moody’s has also said about India’s structural reforms, good growth story, institutional reforms including demonetisation. They have spoken very favourably about it…they also had same two concerns which Moody’s had about fiscal deficit and India’s low per capita growth. My sense is that S&P chose to play a little cautious this year. Though their assessment is almost in line with what Moody’s assessment was and possibly is waiting for some time to upgrade,” Garg said in remarks made after the S&P statement.

He said the government expects the GDP growth for the second quarter, which will be released on November 30, to be better than the first quarter number of 5.7 per cent.

S&P said that the stable outlook reflects its 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,” S&P said. Marked improvement in fiscal performance and reduction in government debt could improve India’s ratings, while downward pressure on the ratings could emerge if GDP growth disappoints, government deficits rise significantly or the reform agenda loses momentum, S&P said.

The BJP-led National Democratic Alliance (NDA) coalition “consolidated power in state-level elections in 2017 and we expect it to make further gains,” S&P noted. The agency said economic growth will be supported by a number of factors in the medium-term including planned recapitalization of state-owned banks that is likely to spur on new lending within the economy, public-sector-led infrastructure investment and robust private consumption. The removal of barriers to domestic trade tied to the imposition of GST should also support GDP growth.

S&P said that India’s government revenue as a percentage of the GDP is lower when compared with peer countries. India has a long history of high net general government fiscal deficits — averaging over 8 per cent of GDP over the past 20 years and 7 per cent in the past five years.

“In addition to expenditure demands, the country’s fiscal challenges also reflect revenue underperformance compared with most peers at the rating level. India’s general government revenue, at an estimated 22 per cent of 2017 GDP, is low compared with peer sovereigns. Administrative efforts to expand the tax base-including demonetization (which has increased the number of tax registrants) and the introduction of the GST in July — corroborate our belief that government revenues will accelerate into the forecast period,” S&P said.

While the agency expects the Central government to “succeed in controlling deficits at the federal level”, it foresees that problems at the state level will add 3 per cent on average to the consolidated general government deficits over the forecast horizon. India’s external position remains a credit strength, S&P said, adding that its expects the Reserve Bank of India to meet its inflation target.

“We forecast that India’s external debt, net of liquid public and financial sector external assets, will average a modest 8.4% of current account receipts over 2017-2020. The level of economywide external indebtedness is likely to remain contained throughout the forecast period, underpinned by an improved current account deficit, which we forecast will average 1.8% over 2017-2020, down from the 2.3% level recorded on average between 2011-2016,” S&P said.