S&P reaffirms India’s BBB- sovereign ratings

Global rating agency Standard and Poor’s has affirmed India’s sovereign ratings with a stable outlook. This is in contrast to rival rating agency Moody’s Investors Service, which had downgraded India’s rating earlier this month.

Expressing confidence that India’s growth rate will remain ahead of its peers despite the pandemic-led economic slowdown, S&P said on Wednesday said that the economy and fiscal position will stabilise and begin to recover from 2021.

While it has forecast a 5 per cent decline in real GDP growth in the current fiscal year, it expects the economy to bounce back with real GDP growth at 8.5 per cent in 2021-22. Growth is then expected to slow down to 6.5 per cent in 2022-23 and then marginally pick up to 6.8 per cent in 2023-24.

This affirmation of the economy’s ability to shrug off the effects of the current slowdown comes days after Moody’s on June 1 downgraded India's ratings to the lowest investment grade of Baa3.

S&P Global Ratings has affirmed its ‘BBB-’ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings for India.

The economy grew by 4.2 per cent in 2019-20 with 3.1 per cent GDP growth in the January to March quarter. With the national lockdown starting in end March and restrictions being lifted, there are expectations of negligible growth in the first quarter of the current fiscal year.

“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, adding that the economic hit from Covid-19 will exacerbate India's weak fiscal settings.

It expects the country to have a much larger fiscal deficit this year, followed by consolidation over the next three years.

“The stable outlook reflects our expectation that India’s economy will recover following the containment of the 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 fiscal year 2021,” it added.

The agency could raise the ratings if the government significantly curtails its fiscal deficit.

Warning note

However, it warned that pressures for a downgrade could emerge over the next one to two years if growth fails to recover “meaningfully” from 2021 or if the government’s fiscal deficit exceeds its estimate. The agency has pegged it at 11 per cent of GDP in the current fiscal year and it could average about 8.4 per cent per year till 2024. India’s fiscal deficit stood at 4.59 per cent of GDP in 2019-20

“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,” it said, noting that migrant workers returning home has weakened the labour markets dramatically, and this may take some time to heal.

Noting that India’s overall external position remains a credit strength, the agency said it expects the current account deficit to decline modestly this year, and to continue to improve over the forecast period.