S&P cautiously optimistic on India outlook

Agency might accord a stable outlook but not a rating upgrade

Market euphoria over a possible Standard & Poor’s (S&P) upgrade of India’s sovereign rating might be overdone, as the agency only went to the extent of expressing “cautious optimism” during a meeting with finance ministry officials last month. Concerned over an over-optimistic tax collection target, a lack of subsidy reforms and inadequate measures to attract foreign investment, S&P might scale up the outlook on its India rating from negative to stable instead of effecting an upgrade.

S&P currently rates India as ‘BBB-’, considered the lowest investment grade. An upgrade would push India to a ‘BBB’ rating, which signifies adequate capacity of the government to meet financial commitments but its being prone to adverse economic conditions. India, however, may have to satisfy itself with a stable outlook for the time being. The outlook upgrade itself could potentially boost investors’ sentiment and encourage foreign inflows.

“Measures so far announced by the government are encouraging in terms of direction and we expect that these will add to the positive sentiment, boosting investment. However, details about how the government will be able to generate economic growth of seven-eight per cent as flagged in the Budget are lacking, and the approach to boost FDI (foreign direct investment) seems rather cautious,” Agost Benard, associate director of sovereign ratings at S&P, said in response to an email query from Business Standard.

In his Budget speech, Finance Minister Arun Jaitley had talked about pushing up economic growth to seven-eight per cent over three-four years against sub-five per cent in the previous two financial years. In the meeting with S&P,  India pitched for a rating upgrade, arguing the economy was on the growth path and fiscal deficit was in control, but it is learnt that the S&P team was worried that the Budget estimate of 20 per cent growth in the tax mop-up would be difficult to meet.

The direct tax collection target for 2014-15 has been fixed 15 per cent higher at Rs 7.36 lakh crore. The growth in 2013-14 was 14 per cent. Indirect tax collections are expected to increase 26 per cent to Rs 6.24 lakh crore, against a meagre growth of 4.6 per cent in the previous year. The target appears very high to analysts but the finance ministry is pinning its hopes on 5.8 per cent GDP growth this year.

“We told them that with growth picking up tax collections would improve. They asked about subsidies, too. We made it clear the room was limited but the government was trying to improve efficiencies. Subsidies can’t go away overnight,” said a finance ministry official, who did not wish to be identified.

Major subsidies, including those on food, fertiliser and petroleum, are pegged at Rs 2.5 lakh crore this year, against Rs 2.4 lakh crore last year. The government has set up a commission to suggest the road map for expenditure reforms, including subsidy reduction.

“The new administration’s commitment to maintain fiscal consolidation by progressively reducing central government fiscal deficits is a positive step on improving the credit metrics of India’s sovereign rating,”Benard said.

“The fiscal policy stance has been a constraining factor for India’s sovereign ratings for some time. Therefore, if the authorities can deliver on their fiscal goals, resulting in a lower debt and interest burden, that would benefit India’s credit fundamentals,” he further added.

Government officials said compared to other rating agencies, S&P was more pessimistic on India, and that it focused more on fiscal consolidation than other economic indicators.

Fitch, Moody’s and JCRA (a rating agency from Japan) are expected to meet finance ministry officials in the coming months.