S&P affirms India's "BBB-" rating with stable outlook; weak points flagged

Agency sees major economic recovery in 2021, normalisation by fiscal 2022; also refers to weak fiscal settings, such as elevated govt deficits and indebtedness, low per capita income

Amid sharp economic contraction, rating agency Standard and Poor’s (S&P) today affirmed India’s sovereign long-term rating at “BBB-”, reflecting above-average long-term economic growth, sound external profile, and evolving monetary settings.

However, it also flagged vulnerabilities due to weak fiscal settings, including consistently elevated general government deficits and indebtedness and low per capita income.

The outlook on the long-term rating is stable. The stable outlook reflects view that India's contraction in fiscal 2021 will be followed by a significant recovery, which will stabilize the country's broader credit profile, S&P said in a statement.

It also affirmed 'A-3' short-term unsolicited foreign and local currency sovereign ratings on India.

 

Economic activity in India is expected to begin to normalise in fiscal 2022, resulting in real Gross Domestic Product (GDP) growth of about 10 per cent. A significant proportion of this rebound will be due to the very weak base in the current fiscal year.

The Indian economy's long-term outperformance highlights its historical resilience. Its wide ranging structural trends, including healthy demographics and competitive unit labour costs work in its favour. These will be challenged by the spread of the pandemic, financial and corporate weakness, and a prolonged decline in investments, it added.

The country’s weak fiscal settings will worsen further this year, constraining the government's ability to aid the economy. At the same time, the country's external settings have improved, helped by the central bank's rapid accumulation of foreign exchange reserves.

The Indian economy will remain a long-term outperformer versus peers with a similar level of income. India's Bharatiya Janata Party (BJP)-led coalition government maintains strong support from the electorate and may seek to capitalize on this by accelerating economic reforms.

India's democratic institutions promote policy stability and compromise, and also underpin the ratings, S&P said.

India's worsening Covid-19 situation, along with strict measures aimed at containing spread of the pandemic, have hit the economy hard. Productive capacity has been severely disrupted since the start of the pandemic. There may be a permanent loss of approximately 13 per cent of output compared with India's pre-pandemic trend.

 

While India's economy continues to outperform peers at a similar level of income on a 10-year weighted average real GDP per capita basis, its performance on this metric has weakened somewhat. Prior to the onset of the Covid-19 pandemic, the Indian economy had already slowed measurably.

Existing vulnerabilities, including a weakened financial sector, rigid labor markets, and weak private investment, could hamper the economic recovery,

Although India's banking sector has ample liquidity, lending conditions remain tight, with limited risk appetite. Credit extension to less creditworthy borrowers in the non-banking financial institution (NBFI) space may be weak for some time owing to heightened prudence in banks' lending standards.

Government measures aimed at backstopping NBFI debt should help to alleviate these conditions to some extent. Liquidity risks are more prevalent in some parts of the NBFI sector, especially for firms in the automobile, small and midsize enterprise (SME), and microfinance segments.