S&P keeps India rating unchanged; government says unfair

Declining to follow Moody's recent India rating upgrade, Standard & Poor's today kept its sovereign rating for the country unchanged at the lowest investment grade of 'BBB-minus' citing high government debt and low income levels.

The government, which had expected an upgrade following Moody's last week giving India the highest rating since 1988, termed the move as "unfair", calling S&P a "conservative" rating agency which has decided to play "cautious".

Changing its outlook about India to "stable" from "negative" in 2014, S&P Global Ratings said country's the 'BBB-minus' rating reflects its strong GDP growth, sound external profile and improving monetary credibility.

But sizable fiscal deficits, a high net general government debt burden and low per capita income detract from the sovereign's credit profile, it said in a statement.

"The stable outlook reflects our view that over the next two years, growth will remain strong, India will maintain its sound external account position and fiscal deficits will remain broadly in line with our expectations," it said.

While Moody's had on last Friday raised India's sovereign rating from the lowest investment grade of Baa3 to Baa2 - the first upgrade in almost 14 years, and changed the outlook from stable to positive, S&P has kept India at the current rating of 'BBB-minus' since 2007.

S&P's highest ever rating for India stood at BBB in 1990 from which it was downgraded in March 1991. In January 2007, S&P had raised sovereign credit ratings on India to 'BBB-' with a stable outlook, from 'BB+'.

Fitch Ratings' current rating of 'BBB', a notch above junk status, stands as its highest ever.

Sanjeev Sanyal, Principal Economic Adviser, termed the rating unchange as "a bit unfair" saying the low per capita income is "neither a reflection on our ability or our willingness to pay debt."

While Economic Affairs Secretary Subhash Chandra Garg said S&P opted "to play a little cautious", Railway Minister Piyush Goyal said the rating agency is known worldwide to be a far more conservative when compared with Moody's or Fitch.

S&P, Garg said, has said "about every thing which Moody's have also" talked about, like India's structural reforms, growth story, and institutional reforms, including demonetisation.

"We are not disappointed but our expectation would be that S&P also takes into account what the government has done," he said.

S&P has reaffirmed India story, he said. He went on to add that the government will stick to the fiscal consolidation path.

"Upward pressure on the ratings could build if the government's reforms markedly improve its net general government fiscal out-turns and so reduce the level of net general government debt," S&P said today.

The upward pressure could also build if India's external accounts strengthen significantly.

On the other side, a disappointing GDP growth, rise in government deficit or political will to maintain reform agenda losing momentum will create downward pressure on the ratings.

It said one-off factors like demonetisation and the imposition of a goods and services tax (GST) had led to some quarterly cooling in India's high growth figures but the medium-term outlook for growth remains favourable.

The growth outlook is supported by rising private consumption, an ambitious public infrastructure investment programme and a bank restructuring plan that should help revive investment.

When Moody's on November 17 upgraded India's sovereign rating to Baa2 -- the highest since 1988, the government was quick to seize the moment to state that the move was "belated recognition" of reforms undertaken.

That rating upgrade was the first since January 2004, putting India in the league of the Philippines and Italy.

In August 2006 Fitch Ratings upgraded India to investment grade at 'BBB-', with a stable outlook, from BB+. Moody's had in 2015 changed rating outlook to 'positive' from 'stable'.

The November 17 rating upgrade came within weeks of the World Bank handing a 30-place jump to India on its ease of doing business ranking to place it at 100th rank.

S&P said the Narendra Modi government has managed to pass a number of reforms to address long-standing impediments to the country's growth.

It went on to list the reforms as introduction of GST on July 1, a Bankruptcy Code and nonperforming loan resolution framework; a plan to recapitalise state-owned banks; a plan to strengthen the business climate by simplifying regulations and improving contract enforcement and trade; and reforms to the energy sector.

"However, confidence and GDP growth in 2017 appear to have been hit by the sudden demonetisation exercise in late 2016. The July 1, 2017 introduction of the GST, which combines the central, state, and local-level indirect taxes into one, has also led to some one-off teething problems that have dampened growth," it said.

But in the medium term, it anticipated that growth will be supported by the planned recapitalisation of state-owned banks, which is likely to spur on new lending within the economy.

India's growth, it said, is among the fastest of all investment-grade sovereigns, and projected real GDP expansion to average 7.6 per cent over 2017-2020.