S&P retains India's rating at lowest investment grade for 13th year in a row

The Indian economy grew at the slowest pace in 11 years at 4.2% in 2019-20.
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Global rating agency S&P on Wednesday retained India's sovereign rating at the lowest investment grade of 'BBB-' for the 13th year in a row, even as it said the economy and fiscal position will stabilise and begin to recover from 2021 onwards.

Affirming the outlook "stable", it said though risks to long-term growth are rising, India's ratings reflect the country's above-average real GDP growth, sound external profile and evolving monetary settings.

S&P Global Ratings has forecast India's economy to shrink by 5% in the current fiscal. It, however, has projected GDP growth to be 8.5% in 2021-22 and 6.5% in 2022-23.

The Indian economy grew at the slowest pace in 11 years at 4.2% in 2019-20.

"While risks to India's long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country's growth rate ahead of peers," S&P said in a statement.

Affirming 'BBB-' long-term and 'A-3' short-term foreign and local currency sovereign credit ratings on India, S&P said it "reflects the country's above-average real GDP growth, sound external profile, and evolving monetary settings".

"India's strong democratic institutions promote policy stability and compromise and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country's low per capita income and consistently elevated fiscal deficits that contribute to high general government debt, net of liquid assets," S&P said.

The government last month announced a support package of Rs 3.70 lakh crore for the micro, small and medium enterprises (MSMEs), Rs 75,000 crore for non-banking lenders or NBFCs and Rs 90,000 crore for power distribution companies. These announcements were part of the overall Rs 20.97 lakh crore economic package unveiled by the government to mitigate the economic impact of the coronavirus crisis.

The Centre had also raised the borrowing limit of states from 3% of gross state domestic product (GSDP) to 5% in 2020-21, which will make available an additional Rs 4.28 lakh crore.

However, part of the increased borrowing limit would be linked to specific reforms undertaken by the states -- universalisation of 'one nation one ration card', 'ease of doing business', power distribution and urban local body revenues.

The government had in September last year announced a concessional tax regime of 22% for all existing domestic companies if they do not avail any specified exemption or incentive.

For new domestic manufacturing companies, the tax rate was lowered to 15% if such company does not avail any specified exemption or incentive.

The rating affirmation comes within days of Moody's Investors Service downgrading by a notch India's sovereign rating to the lowest investment grade with negative outlook, citing growing risks that Asia's third-largest economy will face a prolonged period of slower growth amid rising debt and persistent stress in parts of the financial system.

Fitch Ratings too has a 'BBB-' rating on India, with a stable outlook. Fitch Ratings also forecast a 5% contraction in India's GDP in 2020-21 fiscal and a rebound in the next to 9.5% growth.

S&P said the economic hit from COVID-19 will exacerbate India's weak fiscal settings, but the country will get into the path of fiscal consolidation over the next three years.

"The stable outlook reflects our expectation that India's economy will recover following the containment of COVID-19 pandemic and the country will maintain its sound net external position. The stable outlook also assumes that the government's fiscal deficit will recede markedly following a multi-year high in the fiscal year 2021," S&P said.

S&P said the global economic downturn resulting from the pandemic, along with strict domestic measures aimed at containing the spread of the local epidemic, are hitting the economy hard, and will likely result in a significant fall in activity in the first quarter of this fiscal year (i.e. three months from April 1, 2020).

"Productive capacity has been severely disrupted during this period, and millions of workers have left their jobs to return home, sometimes crossing the country to do so. India's labour markets have therefore weakened dramatically, and may take some time to heal," S&P said.

The rating agency had in 2007 assigned a 'BBB-' rating to India. It has been maintaining a stable outlook on India since September 2014.

Stating that India's low per capita income weighs on its strong economic growth outlook, S&P said India's low per capita income weighs on its strong economic growth outlook.

The strong mandate for the Bharatiya Janata Party-led coalition government in the 2019 parliamentary elections should provide sufficient political capital to push further reforms, but execution remains key, it noted.

Even after incorporating a deep contraction this fiscal year, it said India's economy continues to outperform peers at a similar level of income on a 10-year, weighted average, real GDP per capita basis.

"However, new risks are emerging that could undermine the economy's recovery, even beyond the containment of COVID-19," S&P said.

The economy's long-term outperformance highlights its resilience, the agency added.

India's wide range of structural trends, including healthy demographics and competitive unit labour costs, work in its favour, S&P said.

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