S&P affirms India credit rating after Moody's cut

Retains lowest investment grade rating (BBB-) with stable outlook

Global rating agency Standard & Poor's (S&P) has affirmed its rating on India's long-term foreign and local currency sovereign credit at the lowest investment grade with a stable outlook, saying the country's economy remains “a long-term outperformer versus peers at a similar level of income”.

The rating action by S&P has come days after Moody’s Investors Service downgraded India's rating by a notch.

S&P, however, said the impact of the Covid-19 outbreak posed a significant challenge to the country’s economic growth trajectory. It said the economic growth and the fiscal situation of the Centre and states would improve by next year, and hoped the reforms initiated by the government would bear fruit in the long run.

The rating agency projected the economy to contract 5 per cent in the current financial year, but said it would grow by 8.5 per cent in 2021-22. Similarly, the fiscal deficit of the Centre and states may shoot up to 11 per cent of the country’s gross domestic product (GDP) in FY21, and come down to 8.5 per cent the next financial year. It also expected the country’s current account deficit to stand at 1.1 per cent of GDP in 202021 and then fall to 0.5 per cent next year.

NITI Aayog Vice- Chairman Rajiv Kumar said, “S&P has shown mature understanding of the Indian economic situation and appreciated the resilience and growth potential of the economy.”

Former chief statistician Pronab Sen pointed out that whether it was S&P or Moody’s, “we are at the bottom of the investment grade”.

“One more downgrade and we will be at the non-investment grade level. It does not make much of a difference to investors, except to those who invest in their fiduciary capacity, such as pension funds. They are required to invest in investment-grade entities only,” he said.

Before the recent rating action by Moody's, the agency’s rating on India was a notch above S&P and Fitch's. Now, all the three major rating agencies have the lowest investment grade rating on India. But the outlook by Moody's is negative, whereas it is stable by the other two agencies.

Market experts had mixed views on the rating action. "The markets did not move when Moody's downgraded. The reiteration of rating was expected by everyone. The markets won't move this time too," said Jayesh Mehta, head of treasury at Bank of America. Harihar Krishnamurthy, head of treasury at First Rand Bank, said the markets would interpret the event as "normal".

U R Bhat, director, Dalton Capital India, said, "S&P has maintained its rating on India. This shows the agency's confidence in the government measures to tackle the economic impact of Covid-19. Unlike other countries, we have not ratcheted up fiscal debt. The impact on the markets will be minimal.” Technically, S&P placed India at BBB-. "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,” it said.

However, it said prior to the onset of the pandemic, India's GDP growth rate had already slowed measurably. “Existing vulnerabilities, including a weak financial sector, rigid labour markets, and consistently weak private investment could hamper India's recovery if they are not actively addressed," the agency said.

Nevertheless, India's economy is likely to achieve a strong recovery following the deep contraction in this fiscal year. The

economy's long-term outperformance highlights its resilience. India's wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favour, it said.

A more favourable corporate tax regime, which is particularly supportive of manufacturing firms, should reinforce growth, alongside additional fiscal and monetary easing, S&P said. Some state governments, including those in Uttar Pradesh, Madhya Pradesh, and Gujarat, have also begun to roll back restrictive labour market rules, it pointed out. These efforts are likely in coordination with direction from the central government, which has publicly exhorted states to adopt such measures. Should these measures become more permanent in nature, with broadening participation from other states, this could lead to a meaningful improvement in labour market conditions over time, the rating agency said.

"We expect these reforms to support economic growth over the long-run. Nevertheless, lower revenues resulting from the corporate tax cuts, and much weaker economic activity this year, will continue to undermine the government's fiscal position," it cautioned.