Will downgrade rating if Indian economy doesn't show recovery: S&P

S&P Global Ratings on Thursday forecast India’s 2019-20 gross domestic product (GDP) to grow at 5.1 per cent and warned of a rating downgrade if an economic recovery does not happen.

This comes just days after the agency reiterated its rating and outlook for the country and a month after Moody’s cut its sovereign credit outlook for India. S&P currently has a ‘BBB-’ rating with a ‘stable’ outlook.

In a ‘Frequently Asked Questions’ note on India, S&P said the country’s long-term economic outperformance remained intact, despite the agency’s relatively weaker growth expectations for this fiscal year. “We are forecasting real GDP growth to decelerate to 5.1 per cent. Crucially, this assessment also incorporates our expectations for the economy to gradually recover over the next few years, with correspondingly higher growth,” the agency said.

“If this recovery does not materialise, and it becomes clear that India’s structural growth has significantly deteriorated, we could lower the rating,” said the rating agency’s credit analyst Andrew Woods.

S&P said India’s fiscal metrics, including its fiscal deficit, annual change in net general government indebtedness, and net government debt stock, were weak. These weaknesses have been incorporated in its ‘BBB-’ long-term sovereign credit rating on India for many years, with modest expectations for fiscal consolidation.

“This year looks to be a particularly difficult one for the general government's fiscal position, in view of sluggish revenue performance owing to the economic slowdown, as well as the expected impact of the powerful corporate tax cuts announced in September. We expect government measures that encourage private investment, such as recent corporate tax cuts, will help to address structural weaknesses. Over the long term, India’s ability to return to sustained high GDP growth depends on structural reforms,” the note cautioned.

Earlier this month, the finance ministry had said that S&P had reaffirmed its sovereign credit rating of India at BBB-, and has also maintained its outlook at ‘stable’. A press release on this was issued by the government a day before S&P’s note on the same.

“They ( S&P) have stated that India’s economy continues to achieve impressive long-term growth rates despite a recent deceleration. S&P expects the Indian economy to continue to outperform its peers and that the growth will remain strong over the next two years,” Economic Affairs Secretary Atanu Chakraborty had tweeted.

Thursday’s warning by S&P comes as the Centre fights multiple battles on the economic front. Official data showed on Thursday that the Index of Industrial Production for October contracted by 3.8 per cent, a slight improvement from September which was an eight-year low. Meanwhile, retail inflation rose to 5.54 per cent for November.

On November 29, data showed that GDP rose 4.5 per cent for the July-September quarter. This was a 26-quarter low and even worse than the 5 per cent for the April-June quarter. Even more alarming was manufacturing activity contracting by 1 per cent in the September quarter, down from 5 per cent in the previous quarter.

Nominal GDP growth slipped to 6.1 per cent, the lowest in nearly two decades. Growth in investment (gross fixed capital formation), at a mere 1 per cent, was the slowest since the December 2014 quarter.