Global agency Standard & Poor’s ruled out any rating upgrade for India from the lowest investment grade, saying factors such as its sound external position were offset by low income and weak public finances.
The agency retained India’s rating at ‘BBB-’ with stable outlook and expressed hope that country’s economic growth would average about 8% during 2015-18 period. ‘BBB’ is the lowest investment grade rating and stable outlook reduces risk of possible sovereign rating downgrade.
S&P added it does not expect to change its rating this year or in 2016 based on its current set of forecasts.
The decision is bound to disappoint Prime Minister Narendra Modi’s government, which has argued that India deserves a stronger rating after efforts to keep historically high fiscal deficits in check and to improve economic fundamentals.
Rival agency Moody’s Investors Service in April also kept India at its lowest investment grade rating but raised its outlook to “positive” from “stable”, citing policymakers’ efforts to lift economic growth.
Like Moody’s, S&P welcomed measures to improve the business climate, labour flexibility and the energy sector. But it noted fiscal challenges, such as in generating revenue and controlling spending on subsidies.
“Although we expect the new administration to pursue its stated fiscal consolidation programme, we foresee that planned revenues may not fully materialise and subsidy cuts may be delayed,” S&P said in a statement on Monday.
“Overall, we believe public finances are set to remain key rating constraints for some time.”
Fitch Ratings also rates India at “BBB-minus” with a “stable” outlook.
India is seen as having better economic fundamentals than many of its emerging market peers, thanks to foreign exchange reserves of around $350 billion and efforts to keep its current account and budget deficits in check.
Brazil, for example, was downgraded to “junk” by S&P in September, underscoring the deterioration of its economy and public finances.
S&P said India’s rating reflected its “sound” external profile and improved monetary credibility, including the adoption of inflation targeting and the move to set up a monetary policy committee to decide on interest rates.
The agency expects India’s economy to grow 7.4% this year and average “just under” 8 percent from 2015 to 2018, but sees ratings constrained by low per capita income, of $1,700 this year.
It also called India’s general government borrowing and servicing costs “sizable” at near 70% of gross domestic product.
It cited fiscal constraints including losses at state electricity boards and the high exposure of India’s banks to government debt.
S&P said any rating improvement would require reforms that “markedly improve” the government’s fiscal position and bring net general government debt below 60% of GDP.