Days ahead of the Budget, rating agency S&P on Monday said India must deliver on reform promises and boost growth as a weak fiscal position is constraining its sovereign rating, which is as such just a notch above the junk level. “India’s low income levels and weak fiscal and debt indicators constrain the country’s credit profile,” Standard and Poor’s said in a research note on the country’s rating.
The agency said last year’s election results created a conducive environment for reforms with political stability, but termed the “governance effectiveness” as a “neutral credit factor”. It had upgraded India’s credit rating outlook from ‘negative’ to ‘stable’ in September on hopes of reforms. Prior to that, it had voiced concerns about lack of growth, a sense of “policy paralysis” and the high fiscal deficit, and had even threatened to downgrade the rating to ‘junk’.
S&P on Monday listed key steps that are required for an upgrade from the current sovereign debt credit rating of ‘BBB-minus’ -- the lowest investment grade rating. “Crucial factors include higher growth in real per capita GDP, stronger fiscal and debt metrics, and a stronger external position or improved monetary policy setting, and the Government’s ability to fulfil its promises on key reforms will be critical to the country’s success,” it added.
S&P said higher growth in real per capita GDP, stronger fiscal/debt metrics and an improved external position as well as monetary policy setting are essential to enhance the current ‘BBB-’ rating with a stable outlook. “The Government’s ability to fulfil its promises on key reforms will therefore be critical,” S&P credit analyst Agost Benard said.
Finance Minister Arun Jaitely will present the Union Budget, 2015-16 on February 28 and there are expectations that he may announce some pro-growth measures as also certain steps to benefit the common man. The Government’s fiscal consolidation plan, which entailsa gradual lowering of the fiscal deficit over the next three years, will ease the debt and interest burden but “improvements in India’s weak fiscal balance sheet are likely to be gradual”, Benard said.
The Government has promised to keep the deficit at 4.1 per cent for FY’15 and is targeting to bring it down to 3.6 per cent in FY’16 and push it further to 3 per cent by FY’17. Comparing India with other BBB-rated peers like Brazil, Colombia, Indonesia, the Philippines, South Africa and Uruguay, the agency said the average income in India is “significantly low” and the “Government is also more heavily indebted”.
It added: “The country’s stronger external balance sheet only partly offsets these weaknesses.” Flexibility on the monetary policy front, where RBI has shifted to rate cuts, is “moderately supportive” of the sovereign’s credit-worthiness, it said. Factors such as high savings and investment rates, together with favourable demographics, where 87 per cent of the population is aged 54 or below, put the country in good stead to achieve fast growth.
Growth could touch the 7 per cent mark by 2017, but a projected per capital income of USD 2,404 in 2017 will still leave the country’s wealth at about one-third of the average of similarly rated countries, it said. Commenting on strong performance on the external front, where some analysts are saying the current account could be in surplus, the agency said this is unlikely to lead to an upward rating revision. “We believe any further improvement in external liquidity or balance sheet is unlikely to lead to a higher credit rating,” S&P said.