To enhance India’s creditworthiness, higher growth in real per capita GDP, stronger fiscal and debt metrics, and an improved external position are needed, according to global credit rating agency Standard & Poor’s Ratings Services.
The agency said India’s low income levels and weak fiscal and debt indicators constrain its credit profile.
“However, the political stability following the general elections last year has created a conducive environment for reforms, which could address these weaknesses. “India’s sovereign indicators therefore stand a better chance of closing the gap with those of similarly rated sovereigns,” said S&P in its report ‘Meeting reforms expectations is key to maintaining investment-grade ratings on India’.
S&P has assessed India’s sovereign credit metrics as weak for the ‘BBB’ rating category.
The average income in India is significantly below that of its peers and the Government is also more heavily indebted. The country’s stronger external balance sheet only partly offsets these weaknesses.
“We see institutional and governance effectiveness in the country as a neutral credit factor. We also assess India's monetary flexibility as moderately supportive of the sovereign's creditworthiness,” the report said.
S&P is expecting the Government’s fiscal consolidation plan of progressively lower deficits to ease the debt and interest burden. However, improvements in India’s weak fiscal balance sheet are likely to be gradual.
Faster growth possible The report notes that India’s high savings and investment rates, together with the country’s favourable demographics, with 87 per cent of the population aged 54 or below, put the country in good stead to achieve fast growth.
Standard & Poor’s estimates India’s real GDP growth to near 7 per cent by 2017. However, India’s projected per capita GDP of $2,404 by 2017 will still leave the country’s wealth at about one-third of the average of similarly rated countries.
India’s strong external balance sheet is a support for the sovereign rating, the report says. Given the country’s already strong external credit metrics, S&P believes any further improvement in external liquidity or balance sheet is unlikely to lead to a higher credit rating.