S&P retains India's debt rating

Wed, 21 Oct Pre-Open

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Recently, Standard & Poor's (S&P) kept India's sovereign debt rating unchanged. They maintained the rating at 'BBB-' with a 'stable' outlook. It is the lowest investment grade as per their rankings. Sovereign debt is bonds issued by the Government of India (GOI) in foreign currency or local currency to finance the country's growth. In one of our recent 'The 5 Minute WrapUp', we have explained more in relation to sovereign debt and its consequences.

A 'BBB-' rating indicates that the country has adequate capacity to meet its financial commitments. However the rating also states that certain adverse economic conditions persists which can lead to the weakened capacity of the obligor to meet its financial commitments.

The rating agency stated on earlier occasions that the slow pace of quality reforms were the prime reasons that they will not upgrade the credit ratings. Important laws such as the 'Land Acquisition Bill', and 'Goods and Service Tax Act', are pending in Parliament. GST was to be made effective from the next financial year. However, this seems almost impossible now, as the opposition has not agreed to all the conditions.

Further, low GDP per capita coupled with high fiscal deficit and poor profitability of the public sector banks were reasons for not changing its rating. Reportedly, government has slowed the pace of fiscal consolidation. Fiscal consolidation is a policy effort by the government to bring down the fiscal deficit and public debt. It includes efforts to raise revenues and bring down the subsidy burden.

The Finance Minister, in his budget speech, delayed the deadline for cutting the fiscal deficit to 3% of GDP by one year to 2017-18. Considering crude prices to be at low levels, the rating agency stated that the quality of fiscal consolidation was not as good as it could have been.

However, India faces a pressure of 'downgrade' in rating if growth disappoints due to the stalling of reforms. A downgrade in ratings may lead to a huge outflow of money from Foreign Investors. This happened recently in Brazil. The country's credit rating was downgraded to the 'Junk' status. The move hit the financial markets in Brazil.

Further, rating's agency does not expect to revise India's sovereign rating in either this fiscal year or the next. This will come as a blow to the government. It has been pushing for an upgrade in the country's sovereign ratings.

We believe, factors like infrastructure, ease of doing business, GST, land and labour reforms must be the top priority of the government if it wants an upgrade of India's credit rating any time soon.