S&P differs from Moody’s, holds India rating at lowest investment grade

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New Delhi: Credit rating agency Standard and Poor’s (S&P) on Friday kept its India rating unchanged at the lowest investment grade of BBB–, with a stable outlook, citing a sizeable fiscal deficit, high general government debt and low per capita income.

The Narendra Modi government was expecting an upgrade following one by Moody’s Investors Service last week. Moody’s raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook from stable to positive, expecting that the government’s continued focus on economic and institutional reforms will, over time, enhance India’s high growth potential.

S&P, in a statement, said the stable rating outlook reflects its view that over the next two years, India’s growth will remain strong, it will maintain its sound external account position and fiscal deficits will remain broadly in line with expectations. S&P last upgraded India’s sovereign rating to BBB– from BB+ in January 2007.

Economic affairs secretary Subhash Chandra Garg said S&P had exercised caution though it had views similar to Moody’s on the Indian economy. “S&P has assigned higher weightage to fiscal consolidation. I don’t see their focus on fiscal deficit of states to be sound. But after all it is a judgment call,” he added.

Ranen Banerjee, partner at PwC India, said S&P’s review was clearly a conservative call wherein the agency would like to see the results of government reforms initiated before a rating revision while Moody’s took a call based on the reforms initiated.

“S&P has stated that there will be a case for upward revision in the event of an improvement in fiscal position and reduction in net debt. Given that we are heading into the last year of this government in the next fiscal year, they could have chosen to wait and watch on the path to be taken in the next budget—a populist one or a fiscally prudent one,” he added.

S&P clarified that upward pressure on the ratings could build if the government’s reforms markedly improve its net general government fiscal deficit and lead to a reduction in the level of net general government debt.

“Upward pressure could also build if India’s external accounts strengthen significantly,” it added.

Downward pressure on the ratings could emerge if GDP growth disappoints, bringing about a reassessment of the view on trend growth; if net general government deficit rises significantly; or if the political will to maintain India’s reform agenda significantly loses momentum, S&P said.

The rating agency said though one-off factors such as demonetisation and the imposition of goods and services tax (GST) have led to some quarterly cooling in India’s high growth figures, 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.

S&P projects India’s GDP growth to average 7.6% over 2017-2020.

It said ongoing expenditure pressure at both the central government and state levels will ensure fiscal consolidation remains slow. However, it said India’s external position is a strength given the rupee’s liquidity in international foreign exchange markets.

S&P projected India’s external debt to average a modest 8.4% of current account receipts over 2017-2020, underpinned by an improved current account deficit, which is expected to average 1.8% over 2017-2020, down from the 2.3% level recorded on average between 2011-2016.