S&P Global Ratings has reaffirmed India’s rating at ‘BBB-’, showing that the country has adequate capacity to meet its financial commitments. The outlook on the long-term rating is stable, it said.

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Andrew Wood of S&P Global Ratings said India’s fiscal position indeed remains precarious. “Looking at the fiscal, of course, there have been some challenges, especially over the past 9 months, and probably looking forward to the next fiscal year as well," he noted.

“We do see elevated fiscal deficit persisting as well as net general government indebtedness. We are expecting limited consolidation over the next two years too,” he added.

Wood further said that looking from a sovereign ratings perspective, it is a bit more structural in nature. "We have been incorporating the weakness with India’s fiscal settings into the ‘BBB-’ ratings for a long time. So, this is a bit of a road bump."

Wood said it is certainly a concern on the fiscal side but it is expected to abate as the economy improves. "We expect it to begin to abate as the economy recovers over the next two years and we will eventually see relatively lower fiscal deficits as well.”

Growth drivers

The Indian economy has a long history of such fluctuations in growth and judging by past precedence, it is likely nearing the end, noted Wood. "High-frequency indicators are starting to turnaround, especially the PMI that we have seen lately, as well as sentiment."

Real GDP growth is also likely to gradually recover towards longer-term trend rates, but at a gradual rate, he said.

S&p Global Ratings expects real GDP growth at 5 percent for FY20 and 6 percent for FY20 before a more powerful acceleration beyond that going above 7 percent per year.

India’s wide range of structural trends, including its healthy demographics and competitive unit labour costs, works in its favour, he said. "We also see a more favourable corporate tax regime which was introduced in September of last year being particularly supportive of manufacturing firms and that should reinforce growth alongside additional fiscal and monetary easing that we have had over the past year too."

There are constructive developments on the regulatory front especially with regards to the financial sector, which is probably set into some of the slowdown and loss of momentum in the economy over the past two years, noted Andrew. "But that we feel should be more constructive over the medium term.”

Red flags

“What we are looking at from our perspective is the general government deficit is above 7 percent of GDP and certainly that is again a precarious position to be in," he said.

I"f we were to observe that this fiscal deficit is going to be significantly higher even then what we are forecasting right now, we are forecasting somewhere in the range of 7-7.5 percent per year."

"If it goes well beyond that, we could become more concerned and that could begin to put downward pressure on the ratings.”

First Published:Feb 14, 2020 2:54 PM IST