Growth acceleration supports positive outlook on India’s ratings
KUALA LUMPUR: RAMRatings (RAM) has reaffirmed India’s respectivegBB2(pi)andseaBBB2(pi) global- and Asean-scale sovereign ratings and revised to positive from stable the rating outlook on both scales.
The ratings reflect India’s vast economic potential and ample external buffers. These factors are, however, moderated by its long track record of large fiscal deficits, the government’s hefty debt burden, a sizeable developmentgapandthecountry’s fragile public sector banks.
The positive outlook is largely premisedonIndia’scommendable growth trend, which is stronger than that of peers, and the recent moderation and stabilisation of its inflation rate.
India enjoys favourable economic conditions due to the current low global commodity price environment and ongoing structural reforms.
“We expect India to register a commendable growth rate of seven per cent in 2016, faster than that of its emerging market peers,” says Esther Lai, RAM’s head of Sovereign Ratings.
The realisation of key reforms will be essential to accelerate growth beyond the current trend of 6.5 per cent to seven per cent given the country’s substantial development needs.
Inflation had moderated to a more sustainable pace of 4.9 per cent in 2015 (2014: 6.7 per cent), well within the Reserve Bank of India’s target band of two per cent-six per cent, amid weaker global commodity prices and the implementation of a revamped monetary policy framework.
Further, the muted inflationary environment -a significant contrastfromthepreviouselevated trendindomesticconsumerprices - supports economic growth.
Elsewhere, India’s fiscal matrices remain a key rating constraint, evident from its long track record of wide fiscal deficits (the previous five-year average of 7.5 per cent of gross domestic product (GDP) was larger than that of most emerging economies) and the country’s sizeable debt burden (financial year 2015 (FY15): 71.6 per cent of GDP).
Nevertheless,mostof thesedebts are denominated in rupees (95 per cent) and are held domestically and mitigates some of the risk arising from the debt.
While various long-term budgetary reforms have been proposed, some key revenue measures such as the Goods and Service Tax (GST) have not been implemented due to a challenging policy environment.
Elsewhere, India’s public sector bankshaveremainedfragileowing to a high level of non-performing assets and restructured loans (equivalent to 11.2 per cent of the banking system’s assets).
This is compounded by the substantial capitalisation needs of these banks - estimated at 4.2 per cent of GDP in FY15 - as India moves towards complying with Basel III requirements by FY19.
Consequently, RAM views the structural fragilities of public sector banks as a significant risk to India’s macroeconomic growth and a contingent risk to its government finances.
India’s ratings could be upgraded if its commendable growth trend is maintained without significant macroeconomic imbalances.
A sustainable narrowing of the country’s fiscal deficit, particularly with regard to revenue generation, would also be a credit positive.