DBS sees room for rating outlook upgrade over new 12 months

Improving overall fiscal numbers on the back of faster GDP growth and political stability, coupled with narrowing CAD and GST rollout should lead to a better rating outlook on the country and an upgrade over the 12-24 months, says a report.
"The economy has made clear progress -- a healthy external position with sufficient forex reserves, narrowing current account deficit, improving rural income, higher public sector wages, lower borrowing costs and moderate inflation.
"In light of these progress, an upgrade in the rating outlook appears probable over the next 12 months, which in turn would open the door for a potential rating upgrade over the following 18-24 months," DBS India chief economist Radhika Rao said a report today.

The country is on the the lowest investment grade ladder with a BBB- rating with a stable outlook now.
S&P had raised the outlook to 'stable' from 'negative' in September 2014, while Fitch has a 'stable' rating, and Moody's too raised the outlook to 'positive' in April 2015.
The rating agencies, recently, highlighted stable politics, strong growth, sound external balances, reforms and credible monetary policy as key strengths which should lead to an upgrade later on.

The report listed new inflation targeting framework that ensures RBI and government are on the same page on price control, gradual but wide-ranging reforms, passage of the bankruptcy law, improving the ease of doing business, and the GST rollout by July, as other progress areas.

It can be noted that ratings typically gauge the risk of a government's default on its local or forex obligations, based on a review of factors like political stability, income and economic structure, growth prospects, monetary flexibility, external liquidity and fiscal balances.
On GST Rao said, its rollout by July will be an important test of government's ability to overhaul tax regime.
However, Rao was quick to point out that higher general fiscal deficit, weak balance-sheets of banks and low per-capita GDP are likely to delay a sovereign rating upgrade.
The brokerage also warned that with the states facing higher spending commitments and easing revenue growth, fiscal consolidation will take a backseat this year.

Initial scepticism on demonetisation was addressed by strong growth in the December quarter and improving monetary conditions. But these observations have not translated into affirmative rating action, a DBS Research report said today.
"High fiscal deficit, stressed banks' balance-sheets and low per-capita GDP have been cited as lingering constraints. These constraints are unlikely to materially improve over the next 12 months, hurting the likelihood of a rating upgrade," Rao said.
She said combined Centre's (3.5 per cent) and states' (over 3.5 per cent) fiscal deficits are higher than most of its peers. The diverging moves in the Centre (narrowing) and states (widening) fiscal deficits have kept the deficits elevated at 6.5-7 per cent of GDP in recent years.

She also said rating agencies have often cited the low per-capita GDP as an issue. It has taken the economy more than a decade to double per-capita GDP to USD 1,730 by 2016. "If we assume nominal per-capita GDP growth of 7.6 per cent, it will take another decade to reach USD 4,000-mark," she said.
On the unprecedented spike in NPAs, Rao said gross non-performing advances in public-sector banks rose from 3 per cent in 2012 to 9 per cent last year.
The RBI's studies point to further deterioration to 10.1 per cent by March 2018. Including restructured advances, it could exceed 13-14 per cent from 12 per cent now or at Rs 15 trillion, she said, adding a fifth of industry sub-sectors are in banks' stressed assets category, with base metals and products at over 40 per cent.