)
Only days before the 2015-16 Budget, global ratings agency Standard and Poor’s (S&P) said the government must deliver on its reform promises, as low income levels and weak fiscal indicators were constraining the sovereign’s credit worthiness compared to its peers.
“Higher growth in real per capita gross domestic product (GDP), stronger fiscal and debt metrics, and an improved external position or monetary policy setting are needed to enhance the sovereign’s credit worthiness,” said S&P’s credit analyst Agost Benard in a note on Monday.
“The government’s ability to fulfil its promises on key reforms will, therefore, be critical.”
The agency said last year’s election results created a conducive environment for reforms with political stability, but termed the “governance effectiveness” as a “neutral credit factor”.
It had upgraded India’s credit rating outlook from ‘negative’ to ‘stable’ in September on hopes of reforms.
Prior to that, at thetime of the United Progressive Alliance government, it had voiced concerns about lack of growth, asense of “policy paralysis” and the high fiscal deficit, and had eventhreatened to downgrade the rating to “junk”. It has a ‘BBB’ rating on India, at par with countries like Brazil, Colombia, Indonesia, Philippines, South Africa and Uruguay.
“We assess India’s sovereign credit metrics as weak for the ‘BBB’ rating category. The average income in India is significantly below that of its peers and the government is also more heavily indebted,” Benard said.
Finance Minister Arun Jaitely will present Union Budget 2015-16 on February 28 and there are expectations that he may announce somepro-growth measures as also certain steps to benefit the common man.
The government’s fiscal consolidation plan, which entails gradual lowering of the fiscal deficit over the next three years, will ease the debt and interest burden but “improvements in India’s weak fiscal balance sheet are likely to be gradual,” Benard said.
The government has promised to keep the deficit at 4.1 per cent for FY15 and is targeting to bring it down to 3.6 per cent in FY16 and push it further to three per cent by FY17.
Flexibility on the monetary policy front, where the Reserve Bank of India has shifted to rate cuts, is “moderately supportive” of the sovereign’s credit worthiness, the note said.
Growth could touch the seven per cent mark by 2017, but a projected per capital income of $2,404 in 2017 will still leave the country’s wealth at about one-third of the average of similarly rated countries, it said.
Commenting on strong performance on the external front,where some analysts are saying the current account could be in surplus, theagency said this is unlikely to lead to an upward rating revision. “Webelieve any further improvement in external liquidity or balance sheet isunlikely to lead to a higher credit rating,” S&P said.
