Standard & Poor's (S&P) Global Ratings on Wednesday affirmed India's sovereign rating and maintained a stable outlook on that rating, suggesting that an upgrade is not imminent. Following the review, India's long term sovereign rating remains at the lowest investment grade of BBB-.
The rating reflects a sound external profile and improved monetary credibility of the economy, S&P said in its press release. Vulnerabilities such as the low per capita income and weak public finances are constraints on India's ratings, S&P added.
The agency cited the implementation of the Goods and Services Tax legislation as one of the key reforms that will promote greater economic flexibility and help redress public finances over a period of time.
These reforms, however, will not improve India's public finances in the near term, the rating agency said.
India's Debt Position
While S&P is comfortable with India's external debt position, it expressed concerns about the government's domestic finances.
India has a long history of high general government fiscal deficits (averaging 8.8 percent of GDP over the past 20 years and 7 percent in the past five years), said the rating agency. It added that these deficits have not closed India's sizable shortfalls in basic services and infrastructure.
The result of running high deficit for years is a build-up in public debt and an increase in interest payments.
“India's high fiscal deficits have led to the accumulation of sizable general government borrowings (about 69 percent of GDP, net of liquid assets) and debt servicing costs (over a quarter of general government revenue),” said S&P.
The rating agency sees challenges both on the revenue and the expenditure front.
Revenue, estimated at 21 percent of 2016 GDP, is low among rated sovereigns, said S&P while adding that expenditure constraints, related to subsidies, also persist.
Over the medium term, the rating agency expects some improvement in public finances, following the implementation of the Goods and Services Tax and the consequent expansion in the country's tax base.
Although we expect the administration to pursue medium-term fiscal consolidation, we foresee that planned revenues may not fully materialize and subsidy cuts may be delayed. In the medium term, we expect improved fiscal performance primarily from revenue-side improvements brought about by the coming introduction of the GST and administrative efforts to expand the tax base.S&P Global Ratings
The Bank Recapitalisation Bill
S&P estimates that the country's public sector banks would need a capital infusion of atleast $45 billion by 2019 to meet the Basel III capital norms.
The report says that the government may have to increase its allocation from the currently promised $11 billion, if the banks fail to secure capital from alternative sources.
Even so, S&P sees contingent fiscal risks as limited for the Indian government.
The government may have to increase the allocation if the banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds, and insurance companies. Our Bank Industry Credit Risk Assessment for India is ‘5.' (Where 1 is the highest and 10 is the lowest).S&P Global Ratings
Stronger Monetary Framework
Acknowledging the new monetary policy framework adopted by the country, S&P said these measures will help sustain economic growth.
The agency expects the RBI to meet its inflation target of 5 percent by March 2017.
We expect the RBI to achieve the inflation target of 5% by March 2017 as it advances along a glide path to the medium-term inflation target. Further steps to strengthen policy formulation are being taken through the introduction of a monetary policy committee, improved communication, and efforts to strengthen monetary policy transmission.S&P Global Ratings
The Rating Outlook
S&P says that the current forecast indicates no change in India's rating for this or next year.The case for a positive revision in ratings may increase if the government's reform push enables the general government debt to fall below 60 percent.
Stalling reforms, stagnating growth, the monetary council's failure to meet its targets or a deterioration in the external liquidity situation could prove to be downside risks to the country's rating.
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