Hitting out at the US-based rating agency - S&P Global Ratings for not upgarading India’s sovereign rating, the Government on Wednesday said that upgrade did not come despite having a slew of reforms undertaken by India unparalleled any major economy anywhere in the world. Besides, the Government also asked the rating agency to do some ‘introspection’ as investors globally feel the country is ‘under-rated’.
The kind of strong reaction from the Government came at time when S&P ruled out any upgrade in India’s sovereign rating through 2017, maintaining the lowest investment grade rating of BBB- with a ‘stable’ outlook for India.
“The upgrade did not come despite the fact that reforms undertaken by India unparalleled any major economy anywhere in the world and that calls for ‘introspection’ on part of the rating agencies,” said Economic Affairs Secretary Shaktikanta Das.
At the same time the agency also pointed out that it wanted to see more efforts to lower Government debt to below 60 per cent of GDP and that it did not expect revenues to rise enough to meaningfully lower the deficit over the medium term. “The stable outlook balances India’s sound external position and inclusive policy making tradition against the vulnerabilities stemming from its low per capita income and weak public finances,” S&P said in a statement.
Slamming at the agencies status quo upgrade, Das said, “There was a ‘disconnect’ between what the rating agencies think and investor perception of India. Despite that the Government would continue to take measures to strengthen the economy, boost GDP growth rate and create jobs.”
“If the rating has not been improved, it’s a matter which doesn’t bother us so much. It’s a question which calls for an introspection among those who do the rating,” Das added.
However, the outlook, S&P said, “indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts. like S&P, Fitch Ratings also rates India at ‘BBB-minus’, the lowest investment-grade, with a ‘stable’ outlook. Moody’s Investors Service rates India at an equivalent ‘Baa3’’, but with a ‘positive’ outlook.
In September, another global rating agency Moody’s had termed India’s reforms slow with muted private investment and NPAs a challenge, and had said it could upgrade India’s rating in 1-2 years if it is convinced that reforms are ‘tangible’.
Citing various steps taken by the Government in last two years, Das said, “We have built strong external position, controlling inflation and structural reforms like the Goods and Services Tax (GST) and bankruptcy code, which global investors recognise our efforts. If you compare the various factors which the report itself talk about, is there any other economy that equals thisIJ So with all this if there no improvement I think it’s a matter for the rating agency itself to put a question to itself and perhaps undertake a kind of introspection.”
On the other hand, S&P said the upward pressure on credit ratings could emerge if the Government reforms markedly improve India’s fiscal performance and pushes down the level of net general Government debt below 60 per cent of the GDP. Currently, the Government debt amounts to about 69 per cent of the GDP. Downward pressure on the ratings could re-emerge if growth disappoints as a result of stalling reforms or if interest rate-setting monetary policy committee does not achieve inflation targets.
The rating agency expects economy to grow 7.9 per cent in 2016 and 8 per cent on average over 2016-2018. It also expects current account deficit 0r CAD to be at 1.4 per cent of the GDP in 2016 and the RBI to meet its inflation target of 5 per cent by March 2017.
With regard to banking sector, it also said that the private banks have better profitability, higher internal capital generation and capitalisation with lower-stressed assets than PSU banks.
However, S&P estimated that PSU banks need capital infusion of about $45 billion by 2019, given their weak profitability, to meet Basel III capital norms, as against $11 billion support pledged by the Government. “The Government may have to increase the allocation if banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds, and insurance companies,” S&P said.
Asked about concerns over banking sector expressed by S&P, Das said, “The Government has undertaken a number of measures to address these issues and it is nothing that is not known to us and that will continuously engage the attention of the Government.”
As per S&P outlook, RBI has made progress in lowering CPI inflation following the introduction in February 2015 of its medium-term inflation target band (with 4 per cent CPI inflation plus/minus 2 per cent as the principal nominal anchor for monetary policy). “We expect the RBI to achieve the inflation target of 5 per cent by March 2017 as it advances along a glide path to the medium-term inflation target,” it added.
India has a long history of high general Government fiscal deficits (averaging 8.8 per cent of GDP over the past 20 years and 7 per cent in the past five years). “The deficits have not closed India’s sizable shortfalls in basic services and infrastructure and the country’s fiscal challenges reflect both revenue under-performance and constraints on expenditure,” said S&P.