S&P refuses to do a Moody's; maintains status quo on India's rating

Credit rating agency Standard & Poor’s (S&P) on Friday retained India’s sovereign rating at the lowest investment grade with a stable outlook. It attributed its decision to a weak fiscal position, particularly of states, high government debt, and low per capita income.

S&P’s rating remains at BBB-, one notch above junk and a notch below what Moody’s Investors Service upgraded India to recently. “Their (S&P’s) assessment is almost in line with that of Moody’s, and they are possibly waiting for some time to upgrade,” Economic Affairs Secretary Subhash Chandra Garg told reporters.

S&P said the Narendra Modi government had consolidated power in state elections in 2017 and “we expect it to make further gains”. It also emphasised India's strong democratic institutions and its free press. 

The rating agency estimated that public sector banks would need $30 billion for haircuts on bad debts and for meeting Basel III capital adequacy norms.

The agency pointed out India’s economic growth was forecast to be robust in 2018-20 despite two quarters of weaker-than-expected expansion due to demonetisation and the goods and services tax (GST). Besides, foreign exchange reserves would continue to rise, it added.

The stable outlook means positive and negative factors supporting S&P’s rating are balanced. “The stable outlook reflects our view that over the next two years, growth will remain strong, India will maintain its strong external accounts position, and fiscal deficits will remain broadly in line with our expectations,” the rating agency said.

Railway Minister Piyush Goyal said S&P's assessment was an affirmation of the policies of the government being recognised worldwide as it had given an overall positive outlook with much praise for the government's initiatives.

However, on the issue of upgrade, he said, “(We) didn’t expect any upgrade from S&P this time. Moody’s has done two upgrades so far, and S&P is known to be conservative.” 

Rajiv Kumar, vice chairman of Niti Aayog, said status quo would mean that S&P was not apprised of reforms over the past three years. 

S&P said the ratings could be upgraded if the government's reforms improved markedly its fiscal position and reduced debt levels. A downgrade was likely, it said, if growth was disappointing and fiscal deficits rose inordinately. Also, if the political will to maintain India's reform agenda lost its momentum.

Given a planned rise in public sector-led infrastructure investment and persistent deficits at the state level, fiscal consolidation would remain difficult, S&P said. Besides, the country's fiscal challenges reflect revenue underperformance; India's general government revenue, at an estimated 22 per cent of the GDP, is low among peer sovereigns.

However, S&P said administrative efforts to expand the tax base, including demonetisation, which had increased the number of tax registrants, and the introduction of the GST in July, would accelerate government revenues.

The agency expected the Centre to succeed in controlling its deficits, but it said problems at the state level would add 3 per cent on average to the consolidated general government deficit during 2018-20. Besides, India's per capita income is estimated at close to $2,000 in 2017, the lowest for all investment-grade economies that S&P rates.  

Ranen Banerjee of  PwC said S&P’s review took into consideration a perspective over the past three years, while Moody’s one was over 13 years. "This  is clearly a conservative call wherein S&P would like to see the results of the reforms initiated before a ratings revision, while Moody has taken the call based on the reforms initiated."

S&P said though demonetisation and the GST had led to some cooling in economic growth, the medium-term outlook remained favourable based on private consumption, an ambitious public infrastructure investment programme, and a bank restructuring plan that should help revive investment.

The agency praised the government for the GST, the Insolvency and Bankruptcy Code, and the framework to resolve non-performing loans of banks. The government's plans to recapitalise state-owned banks and improve the business climate and energy reforms also found mention in S&P’s assessment.

It cited the "Triennial Central Bank Survey," published in April 2016 by the Bank for International Settlements (BIS), to state the rupee was traded in 1.1 per cent of all foreign exchange transactions globally. "We, therefore, consider the rupee to be an  actively traded currency, which increases India's ability to finance external  imbalances. The recent increased issuance of offshore rupee-denominated bonds (masala bonds) is a testament to this flexibility," it said.

S&P forecasts India's external debt, net of liquid public and financial sector external assets, will average a modest 8.4 per cent of current account receipts over 2017-2020.

The level of economy-wide external indebtedness is likely to be contained by an improved the current account deficit, which S&P forecasts will average 1.8 per cent over 2017-2020, down from 2.3 per cent recorded on average between 2011 and 2016.