Are We Losing Sleep Over The Fundamentals Of India’s Sovereign Rating?

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Are We Losing Sleep Over The Fundamentals Of India’s Sovereign Rating?
Vishav - 11 June 2020
New Delhi, June 11: Global credit rating agency S&P Global has decided to retain India’s long-term credit rating as "BBB-", the lowest investment grade rating, albeit with a "stable" outlook. This comes days after another global credit ratings major, Moody's Investor Services, downgraded India's sovereign rating to "Baa3" from "Baa2".
With this, both the agencies now have the lowest investment grade rating for India. However, while S&P retained its outlook as “stable”, Moody’s had maintained India’s outlook as “negative”, indicating there could be another downgrade in the future.

In an official statement, S&P said India’s “stable outlook” reflected the rating agency’s expectation that Indian economy would recover following the containment of the COVID-19 pandemic. It added the stable outlook also assumed that the government’s fiscal deficit would recede after a multi-year high deficit, which is expected in the current fiscal.

Last week, Moody's after downgrading India's sovereign rating from ‘Baa2’ to ‘Baa3’, the lowest investment grade with a 'negative' outlook, said the decision was driven by low growth of the economy as compared to the potential and concerns over debt affordability. With negative outlook meaning there could be another downgrade, this would take India’s rating from “Investment Grade” to “Speculative Grade” territory, which has a higher risk of default.

For this very reason, S&P’s affirmation of India’s rating retaining “stable” outlook came as a relief to the government. The rating agency that amid the presence of rising long-term growth risks, the proper execution of the on-going reform process could result in India’s growth rate being ahead of its peers.

For this year, S&P expects Indian economy to contract by 5 per cent whereas Moody’s expects it to contract by 4 per cent due to the coronavirus pandemic and related lockdown measures.

In FY22, S&P said, the Indian economy was expected to make a strong comeback with projected growth rate of 8.5 per cent. Moody’s also projected India’s growth rate for next fiscal at 8.7 per cent.

“The economy’s long-term outperformance highlights its resilience. India’s wide range of structural trends, including healthy demographics and competitive unit labour costs, work in its favour,” S&P said.

“A more favourable corporate tax regime, which is particularly supportive of manufacturing firms, should reinforce growth, alongside additional fiscal and monetary easing,” it added.
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