Just five days before the budget, rating agency Standard & Poor’s (S&P) on Monday said India must deliver on reform promises and boost growth, as low-income levels and weak fiscal indicators in Asia’s third-largest economy is constraining its credit profile.
The report pulled down the Sensex, which fell 256 points, or 0.8%, to 28,975.11, countering a positive sentiment in early trade when the market was riding on a wave of heightened expectations from the budget, which is scheduled on February 28.
The rating agency said India must boost growth, reduce fiscal deficit — shorthand for the measure of the amount the government borrows to fund its expenses — and carry out its promise of financial reforms to justify a rating upgrade."The average income in India is significantly below that of its peers and the government is also more heavily indebted. We assess India’s sovereign credit metrics as weak for the ‘BBB’ rating category. However, the political stability following the general elections last year has created a conducive environment for reforms, which could address these weaknesses," S&P said in a report titled Meeting Reforms Expectations Is Key To Maintaining Investment-Grade Ratings On India.
In September last year, the rating agency had raised India’s credit outlook to stable from negative, attributing the upgrade to the improved outlook following the Narendra Modi-led government coming to power. Prior to that, it had voiced concerns about lack of growth, a sense of “policy paralysis” and high fiscal deficit, and had even threatened to downgrade the rating to ‘junk’.
A ‘junk” rating raises overseas borrowing costs for Indian companies and hits foreign inflows.
The government’s fiscal consolidation plan — a gradual lowering of the fiscal deficit over the next three years— will ease the debt and interest burden but “improvements in India’s weak fiscal balance sheet are likely to be gradual,” S&P said. The government has set a fiscal deficit target of 4.1% of GDP for 2014-15.
Flexibility on the monetary policy front, where RBI has shifted to rate cuts, is “moderately supportive” of the sovereign’s credit-worthiness, it said. Factors such as high savings and investment rates put the country in good stead to achieve fast growth.
Most of the issues raised in the S&P report are likely to be addressed in the budget, which will be closely watched for the government’s efforts to revive the economy, which had slackened after a global slowdown. This had hampered growth estimates in one of the world’s fastest-growing economies.
“I don’t think we should be duly concerned with the (S&P) report, when all parametres in the economy are robust,” said Rasesh Shah, founder, Edelweiss Group. “Forex reserves are strong, inflation is down and the current account deficit has improved. The government has been making all the right statements and taking correct steps to address issues of growth. Of course, things cant improve overnight. They will take some time.”
The International Monetary Fund (IMF) said in a report last month that the economy could overtake China in 2016 with an estimated GDP growth of 6.5% against China’s 6.3%.
(with agency inputs)