Does India have a case for the upgrade it seeks from raters?

Economy is yet to reach pre-covid level on many fronts but reforms may help

India, last month, sought a rating upgrade. While Moody’s Investors Service has obliged it by upgrading the outlook on sovereign ratings to stable from positive, it retained the sovereign ratings. As such, Moody’s action has fallen short of India’s expectations. These are some parameters of India’s economy that count for any upgrade by rating agencies.

High-frequency indicators

Before Moody’s action on the outlook of sovereign ratings for India, S&P had affirmed India’s sovereign rating at lowest investment grade and stable outlook in July. Since then, quite a lot of important data has come. High frequency indicators did tell us that economic growth is fast recovering to prepandemic levels. For instance, while industrial production was up 11.5 per cent in July, it was short of the 2019 July figure by only 0.3 per cent.

Arun Singh, global chief economist at Dun and Bradstreet, said, “Highfrequency data has shown recovery and is gaining pace as containment measures have been scaled back.”

Financial sector risks

It is receding risks from the financial sector that gave comfort to Moody’s to upgrade the outlook.

As can be seen from the chart, gross non-performing assets of scheduled commercial banks declined to 7.5 per cent at end March, 2020-21. This is despite Covid-19. Bad debts, as a proportion of total advances, stood at the same level as March 31, 2016.

Non-banking financial companies (NBFCS) such as IL&FS and DHFL, which were earlier marked by crisis, saw their nonperforming assets (NPAS) decline to 6.4 per cent at the end of 2020-21 from 6.8 per cent a year ago. Recently, the government created National Asset Reconstruction Company (NARCL), a bad bank, which is expected to turn around NPAS amounting to ~2 trillion.

Fiscal deficit

After remaining in reasonable limits for two years of 2017-18 and 2018-19, the combined fiscal deficit of the Centre and states rose significantly to 7.8 per cent of GDP in 2019-20. This comes even though Covid had impacted the economy in the last week of the fiscal year only, when the national lockdown was announced for the first time. Next year, Covid had raised it to an estimated 14.2 per cent, even as the Centre's fiscal deficit did slightly better than revised estimates. This year, it again may remain in double digits with the Centre's deficit itself pegged at 6.5 per cent of GDP.

Debt-to-gdp ratio

The country’s debt worsened as the government brought in various schemes to help the vulnerable sections of society survive during financial years 2020-21 and 2021-22. Debt is estimated to have touched 84.2 per cent of GDP in 2020-21. High debt of the Centre and the states can come in the way of any upgrade of India’s sovereign ratings. Yuvika Singhal, economist at Quanteco Research, said the sovereign rating upgrade is unlikely at the current fiscal deficit and debt levels. Ranen Banerjee, leader of economic advisory services at PWC India, said it may be a bit early before rating agencies could consider an upgrade as the projected deficit is still high at over six per cent and the debt stock has risen significantly.

Reforms

Recently, the government amended the Income Tax Act to do away with a provision to tax overseas deals for acquiring assets in India with retrospective effect. The other recent reform measures included PLI scheme for auto and textiles, pipeline of monetising assets.

The case for an upgrade by India may have to wait till reform measures make it easier for companies to operate and enable banks to deal with bad assets better.