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S&P retains BBB- rating on India; keeps outlook stable

ANI | Updated: Nov 24, 2017 18:19 IST

New Delhi [India], Nov 24 (ANI): Financial services company Standard & Poor's (S&P) on Friday retained its outlook on India as stable, and kept the rating unchanged at BBB-.

While the agency retained its rating on India, it also lauded the Modi-led government's fiscal consolidation drive under which multiple reforms were taken towards the path of a favourable economy.

The report noted that despite two quarters of weaker-than expected growth, India's economy will grow robustly in 2018-20, and foreign exchange reserves will continue to rise.

Further, it stated that over the next two years, India's growth will remain strong and fiscal deficits will remain broadly in line with the expectations.

While upward pressure on ratings could be created with an improvement of the economic reforms, downward pressure could emerge if GDP growth disappoints, fiscal deficit rises or political will to maintain the reform agenda loses momentum, the report stated.

The rating agency lauded various reforms taken by the Modi-led government including the Goods and Services Tax (GST), Insolvency and Bankruptcy Code, 2016 and others.

It states that confidence and GDP growth in 2017 were shaken by the demonetisation exercise, and the new taxation scheme, which resulted in dampening of growth.

However, the report noted that growth in the medium term will be supported by the bank recapitalisation plan and public-sector-led infrastructure investment, which is expected to stimulate economic activity along with robust private consumption.

"Given the planned ramp-up in public sector-led infrastructure investment and the persistent deficits, especially at the state level, fiscal consolidation will remain difficult. The rupee's liquidity in international foreign exchange markets will continue to buttress our external assessment. Recapitalisation of state-owned banks is likely to pave the way for a revival of credit expansion from 2018," the report observed.

Against the backdrop of the planned ramp-up in public-sector-led infrastructure investments, as well as persistent deficits at the state level, the company noted that the large general government debt load and India's overall weak public finances continue to constrain the ratings.

"India has a long history of high net general government fiscal deficits (net of liquid assets, deficits averaged over 8 percent of GDP over the past 20 years and 7 percent in the past five years). The planned large infrastructure investment program is likely to limit expenditure flexibility, even though the government is likely to be able to tap private sector funds for the construction of many of these infrastructure projects," it noted,

In addition to expenditure demands, the company stated that the country's fiscal challenges also reflect revenue underperformance compared with most peers at the rating level.

"India's general government revenue, at an estimated 22 percent of 2017 GDP, is low compared with peer sovereigns. Administrative efforts to expand the tax base--including demonetisation (which has increased the number of tax registrants) and the introduction of the GST in July--corroborate our belief that government revenues will accelerate into the forecast period. Although we expect central government to broadly succeed in controlling deficits at the federal level, we foresee that problems at the state level will add three percent on average to the consolidated general government deficits over the forecast horizon," it argued.

The ratings on India reflect the country's strong GDP growth, sound external profile, and improving monetary credibility. India's strong democratic institutions and its free press promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country's low per capita income and relatively high general government debt stock, net of liquid assets. (ANI)