India’s credit rating at BBB and a stable outlook

India’s credit rating at BBB and a stable outlook

S&P Global Ratings retained the lowest investment grade (BBB-) credit rating earlier this week. A stable outlook is foreseen, with the economy of the country and the fiscal position predicted to stabilize and recover from the next year onwards. 

This affirmation of the sovereign rating comes across as a huge relief ever since Moody’s Investors Service downgraded India’s sovereign rating one notch to the lowest investment grade. As per Fitch Ratings, a lack of credible medium-term strategies that can stabilize the increasing public debt of the country once the pandemic is contained could put a downwards pressure on these ratings. 

The economy has been adversely hit by the COVID 19. This will naturally exacerbate the weak fiscal settings of the country. A larger fiscal deficit is foreseen this year, with a consolidation over the next three years to follow, as per S&P. 

S&P however also cautioned that this downward pressure on the sovereign rating could emerge over the next few years if the GDP growth of the country fails to recover from 2021 onwards, and the trend growth rate falls towards the average. The net general government deficits would materially exceed the forecasts of S&P and would signify a weakening of the institutional capacity to help maintain public finances. On the upside, the S&P could upgrade the rating of India, if the government curtails its fiscal deficits. Naturally, this would result in a materially low net indebtedness at the general government level. 

The proposed float of shares of LIC will be crucial for the government to consolidate the fiscal position, following the rise in the deficit this year. On balance, this deficit will decline meaningfully next year, below 10% GDP, assuming that the economy stabilizes and enters into the recovery phase. 

As per S&P, its stable outlook for India reflects the economy’s expectations about recovery when the virus is contained, and that the country will be able to maintain its net external position. As per projections, the economy will contract by 5% in FY21, before making a recovery and growing at 8.5% in the FY22. 

The long term outperformance of the economy highlights the resilience of the country. The wide range of our structural trends, including the competitive unit labor costs and healthy demographics, work in our favor. A suitable tax regime, which supports manufacturing firms, will help reinforce growth, along with monetary and fiscal easing. 

The rating agency also stated that the Prime Minister's robust mandate might empower the government, and enact further economic reforms in the country, such as liberalization of labor markets. Only last month, the government announced a 20 trillion package to support weak sections of the society and to ease the liquidity conditions for small industries