Govt slams S&P for not upgrading India's rating despite reforms

The government, on Wednesday, slammed global rating agencies for not upgrading India's sovereign rating despite a slew of reforms, saying they need to do some "introspection" as investors globally feel the country is "under-rated". The status quo in the rating triggered an angry reaction from the government with Economic Affairs Secretary Shaktikanta Das saying that upgrade did not come despite the fact that reforms undertaken by India unparalleled any major economy anywhere in the world and that calls for 'introspection' on part of the rating agencies. Stating that there was a "disconnect" between what the rating agencies think and investor perception of India, he said the government would continue to take measures to strengthen the economy, boost GDP growth rate and create jobs. 

S&P, on Wednesday, ruled out any upgrade in India's sovereign rating through 2017 despite policy stability and reforms, triggering a strong reaction from the government which asked the US-based agency to introspect as there was a disconnect between its thinking and investors' perception. S&P Global Ratings maintained the lowest investment grade rating of 'BBB-' with a 'stable' outlook for India saying it wants to see more efforts to lower government debt to below 60 % of GDP and that it did not expect revenues to rise enough to meaningfully lower the deficit over the medium term.

"The stable outlook balances India's sound external position and inclusive policy making tradition against the vulnerabilities stemming from its low per capita income and weak public finances," S&P said in a statement. The outlook, it said, "indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts". Like S&P, Fitch Ratings also rates India at 'BBB-minus', the lowest investment-grade, with a 'stable' outlook. Moody's Investors Service rates India at an equivalent 'Baa3', but with a "positive" outlook.

"If the rating has not been improved, it's a matter which doesn't bother us so much. It's a question which calls for an introspection among those who do the rating," Das said. In September, another global rating agency Moody's had termed India's reforms slow with muted private investment and NPAs a challenge, and had said it could upgrade India's rating in 1-2 years if it is convinced that reforms are "tangible". Das said global investors feel India is highly "under- rated". "There is a disconnect, therefore, between what the investors are thinking of, what they have in their mind, and (what) the rating agencies are concluding. I think somewhere there is a disconnect," he said. Das cited various steps taken by the government in last two years, including building strong external position, controlling inflation and structural reforms like the Goods and Services Tax and bankruptcy code, saying that globally investors recognise these. 

"If you compare the various factors which the report itself talk about, is there any other economy that equals this? So with all this if there no improvement I think it's a matter for the rating agency itself to put a question to itself and perhaps undertake a kind of introspection," he said. The government will continue to adhere to the path of economic reforms, the various policy initiatives, he said, adding that the reforms will continue and it's for the rating agencies to take their own view.

"I am not questioning anybody's methodology now. It's a detailed report we have to go through. They are independent rating agencies. And we value their comments...and attach a lot of importance to the comments and observations of all the rating agencies," he said. 

S&P said the upward pressure on credit ratings could emerge if the government reforms markedly improve India's fiscal performance and pushes down the level of net general government debt below 60 % of the GDP. Currently, government debt amounts to about 69 % of the GDP. Downward pressure on the ratings could re-emerge if growth disappoints as a result of stalling reforms or if interest rate-setting monetary policy committee does not achieve inflation targets. 

A higher-than-expected deterioration in the nation's external liquidity position could also put downward pressure on ratings, S&P added. The rating agency expects economy to grow 7.9 % in 2016 and 8 % on average over 2016-2018. It also expects current account deficit to be at 1.4 % of the GDP in 2016 and the RBI to meet its inflation target of 5 % by March 2017. With regard to banking sector, it said the private banks have better profitability, higher internal capital generation and capitalisation with lower-stressed assets than PSU banks.

S&P estimated that PSU banks need capital infusion of about $45 billion (around Rs 3 lakh crore) by 2019, given their weak profitability, to meet Basel III capital norms, as against $11 billion (around Rs 73,381 crore) support pledged by the government. The government may have to increase the allocation if banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds, and insurance companies, S&P added.