S&P retains India's rating at BBB-, rules out upgrade for next two years; 'introspect', govt hits out

New Delhi: Global rating agency Standard & Poor's on Wednesday ruled out any upgrade in India's sovereign rating through 2017 despite policy stability and reforms, triggering a strong reaction from the government which asked the US-based agency to introspect as there was a disconnect between its thinking and investors' perception.

S&P Global Ratings maintained the lowest investment grade rating of 'BBB-' with a 'stable' outlook for India saying it wants to see more efforts to lower government debt to below 60 percent of GDP and that it did not expect revenues to rise enough to meaningfully lower the deficit over the medium term.

"The stable outlook balances India's sound external position and inclusive policy making tradition against the vulnerabilities stemming from its low per capita income and weak public finances," S&P said in a statement.

The outlook, it said, "indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts".

Like S&P, Fitch Ratings also rates India at 'BBB-minus', the lowest investment-grade, with a 'stable' outlook. Moody's Investors Service rates India at an equivalent 'Baa3', but with a "positive" outlook.

The status quo in the rating triggered an angry reaction from the government with Economic Affairs Secretary Shaktikanta Das saying that upgrade did not come despite the fact that reforms undertaken by India unparalleled any major economy anywhere in the world and that calls for 'introspection' on part of the rating agencies.

Stating that there was a "disconnect" between what the rating agencies think and investor perception of India, he said the government would continue to take measures to strengthen the economy, boost GDP growth rate and create jobs.

"If the rating has not been improved, it's a matter which doesn't bother us so much. It's a question which calls for an introspection among those who do the rating," Das said.

In September, another global rating agency Moody's had termed India's reforms slow with muted private investment and NPAs a challenge, and had said it could upgrade India's rating in 1-2 years if it is convinced that reforms are "tangible".

Das said global investors feel India is highly "under- rated".

Das cited various steps taken by the government in last two years, including building strong external position, controlling inflation and structural reforms like the Goods and Services Tax and bankruptcy code, saying that globally investors recognise these.

"If you compare the various factors which the report itself talk about, is there any other economy that equals this? So with all this if there no improvement I think it's a matter for the rating agency itself to put a question to itself and perhaps undertake a kind of introspection," he said.

The government will continue to adhere to the path of economic reforms, the various policy initiatives, he said, adding that the reforms will continue and it's for the rating agencies to take their own view.

S&P said the upward pressure on credit ratings could emerge if the government reforms markedly improve India's fiscal performance and pushes down the level of net general government debt below 60 percent of the GDP.

Currently, government debt amounts to about 69 percent of the GDP.

Downward pressure on the ratings could re-emerge if growth disappoints as a result of stalling reforms or if interest rate-setting monetary policy committee does not achieve inflation targets.

A higher-than-expected deterioration in the nation's external liquidity position could also put downward pressure on ratings, S&P added.

The rating agency expects economy to grow 7.9 percent in 2016 and 8 percent on average over 2016-2018. It also expects current account deficit to be at 1.4 percent of the GDP in 2016 and the RBI to meet its inflation target of 5 percent by March 2017.

With regard to banking sector, it said the private banks have better profitability, higher internal capital generation and capitalisation with lower-stressed assets than PSU banks.

S&P estimated that PSU banks need capital infusion of about USD 45 billion by 2019, given their weak profitability, to meet Basel III capital norms, as against USD 11 billion support pledged by the government.

The government may have to increase the allocation if banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds, and insurance companies, S&P added.

Asked about concerns over banking sector expressed by S&P, Das said: "The government has undertaken a number of measures to address these issues. It is nothing that is not known to us and that will continuously engage the attention of the government."

S&P said RBI has made progress in lowering CPI inflation following the introduction in February 2015 of its medium-term inflation target band (with 4 percent CPI inflation plus/minus 2 percent as the principal nominal anchor for monetary policy).

"We expect the RBI to achieve the inflation target of 5 percent by March 2017 as it advances along a glide path to the medium-term inflation target," it added.

These measures by the central bank will support its ability to sustain economic growth while attenuating economic or financial shocks, the rating agency said.

S&P had in September 2014 upgraded India's rating outlook to stable from negative and said that a strong political mandate would help in fiscal and economic reforms.

In today's report, S&P said improvements in policymaking continue to strengthen and flagged wide fiscal deficits, a heavy debt burden, and low per capita income of USD 1,700 as concerns.

It expressed concerns over government delaying subsidy cuts and the banking sector needing about USD 45 billion, or 2 percent of the India's GDP, in capital infusion by 2019.

"Overall, we believe public finances are set to remain key rating constraints for some time," S&P said.

"We believe domestic supply-side factors will increasingly bind economic performance and the government has little ability to undertake countercyclical fiscal policy given its current debt burden," it said.

This debt load and India's overall weak public finances are additional rating constraints, it said.

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).

The deficits have not closed India's sizable shortfalls in basic services and infrastructure, S&P said, adding the country's fiscal challenges reflect both revenue under-performance and constraints on expenditure.

It said India's high fiscal deficits have led to the accumulation of sizable general government borrowings (about 69 percent of GDP, net of liquid assets).

It, however, welcomed government efforts to "address longstanding impediments to growth," including the passage of GST and other reforms such as in labour and the energy sector as also RBI action to reduce inflation and enhancing monetary policy credibility.