S&P differs from Moody’s over improving India’s rating

Standard and Poor’s (S&P) a popular credit rating agency on Friday 24 November, kept its rating of India unchanged, i.e. at the lowest investment grade of BBB–, at a stable outlook. The reasons cited for no change in improvement of Indian credit rating were, a heavy fiscal deficit, high government debt and particularly low per capita income.

The rating agency has said that factors such as the imposition of goods and services tax (GST) and demonetisation have led to a little quarterly stalling in India’s high growth potential, the medium-term outlook for the growth of Indian Economy remains very favourable. This analysis was based on private consumption, a highly ambitious public infrastructure programme, and a bank restructuring plan that is supposed to help increase the investments.

The Narendra Modi government has been expecting an upgrade in its rating following an increase by Moody’s Investors Service (a similar credit rating agency), last week. Moody’s has raised India’s sovereign credit rating from the lowest investment grade i.e. Baa3 to Baa2, and has also changed the outlook of economy from stable to positive. It is expected that if the government continues to focus on economic and institutional reforms, it will, over some time, enhance India’s growth potential that is particularly high.

S&P though, in its statement, said that the stable rating outlook duly reflects its view that in the next two years, India’s economy will continue to grow strongly and it will maintain its external account position and the fiscal deficits will remain manageable. S&P had last upgraded India’s sovereign rating from BB+ to BBB– in January 2007, i.e. 10 years ago.

Subhash Chandra Garg, who is the Economic affairs secretary, has said in a statement that S&P has exercised caution, though it also has hopeful views similar to Moody’s about the Indian economy.

Ranen Banerjee, who is the partner at PwC India has said  in his statement that S&P’s review is very clearly a conservative call in which the agency prefers to see the results of government reforms that are initiated before a revision in rating while Moody’s on the other hand went through a rating revision based on the initiated reforms.

S&P’s has clarified that ratings might improve if the government’s reforms improve the net general government fiscal deficit and also lead to a reduction in the total level of net general government debt. Similarly they might also improve if India’s external accounts strengthen by a significant amount.

In a warning it said that the rating might fall if the GDP growth turns out to be a disappointment. It will also fall if the net general government deficit rises by a significant amount.

S&P’s has projected India’s external debt to an average of 8.4% of current account receipts from 2017 to 2020, being underpinned by an improved current account deficit, which expectedly averages at 1.8% from 2017 to 2020.

S&P’s has projected India’s GDP growth to an average of 7.6% from 2017 to 2020. It has also said that any ongoing expenditure pressure at either the central government or the state levels will slow the fiscal consolidation. However, India’s external position will strengthen because of the rupee’s liquidity in the international foreign exchange markets.

-Archit