Moody’s has upgraded India’s rating to Baa2 form Baa3 with
stable outlook from earlier Baa2 with positive outlook (just above junk); this
rating upgrade coincided with FM’s address to a group of angel investors in
Singapore, where Moody’s operate for its SE analytics.
This rating upgrade may be due to recent Govt initiative to
recaps the fragile PSBS to kick start lending & private capex thereof and
“visible” improvement in India’s ease of doing business. USDINR plunged by around 0.65% and 10YGSEC yield slumped by almost
1.25% to around 6.974% (rating upgrade will ease borrowing costs); but they
recovered in late trade.
Although, Moody’s upgrade was not totally unexpected, the timing
of the same may have baffled the market to some extent amid slump in GDP amid various
economic uncertainties (GST & DeMo).
Moody’s believe that full implementation of GST, effective
resolution of corporate NPA through IBC mechanism, formalization of economy
through DeMo & GST-UID (better tax compliance) are the major reforms
supporting India’s upgrade, although these reform are in the half
implementation stage.
Moody’s also believe that recent Govt step to recalibrate GST
compliance issues for SMES & Exporters will ease the burden on them, which
in turn will gradually help to revive India’s GDP to 6.7% by March’18 from
current 5.7% and further towards 7.5% by March’19.
Moody’s has also
acknowledged GST & DeMo blues for slump in India’s GDP recently; basically Moody’s has upgraded India on
hopes of further policy reforms amid rock solid political stability of NAMO despite
several economical uncertainties. Thus it’s a sole credit for NAMO and may be
termed as a “Santa Gift” to Modi by Moody’s.
Moody’s Upgrade India To
Baa2 From Baa3 On Hopes Of Economic Reform Despite Several Headwinds &
Economic Uncertainties:
Moody’s has identified India’s high debt/GDP ratio (68% actual in 2016 & now
around 70%), high public/house hold debt, improper implementation of GST, muted
private capex, slow resolution of corporate NPA even through IBC/NCLT process,
lack of progress in land & labour reform, any significant deterioration in
fiscal math and health of PSBS or sharp increase external vulnerability are
some of the major risks for India’s
rating.
But Moody’s may also
consider for further rating upgrade, if there
will be significance improvement in India’s fiscal math (metrics) in
combination with durable recovery or improvement in private capex &
investment cycle.
Overall, after this historical rating upgrade, Moody’s is
expected not to change the same in the foreseeable future except some terrible
economic conditions or any surprised improvement in fiscal math or private
capex as this upgrade comes with a time lag (“belated” as described by our FM).
Although Moody’s has identified nearly all the pros & cons
of India’s rating, it is surprisingly silenced about India’s low per capita
income (GDP per capita) this time, which it mentioned in its previous report (Nov’16) as a major
constraint for India’s rating upgrade along with some other legacy problem like
stressed twin B/S of corporates & banks and muted private capex.
In Nov’16 rating action report, Moody’s has not considered DeMo
blues; but signalled about India’s stable( Baa3) rating rationale on the
expectation that India’s GDP growth will outperform its peers; but since then India’s
GDP has plummeted significantly over its peers and Moody’s failed to recognize that
fact in its Nov’17 report.
In its Nov’16 report, Moody’s acknowledged about India’s
incremental policy reforms, but refrained from any rating upgrade on the fact
that those policy effort & promise for the reduction in the country’s debt
burden has not yield any real dividends (results) to support for an upgrade.
However, Moody’s has given a clear signal that they will consider
India for upgrade if GDP accelerates with reduction in India’s debt burden-“Moody's still expects that the measures
taken to date, together with further reforms, will in time achieve those
objectives and support an upgrade to Baa2”. Thus, Nov’17 upgrade
by Moody’s is not at all unexpected despite any visible improvement in India’s
GDP growth and Debt/GDP ratio or nominal fiscal deficit (Govt debt).
Moody’s
may have acted in Nov’17 on huge improvement in ease of doing business &
Govt’s plan to recap the PSBS, despite other headwinds (lower GDP, muted
private capex, higher Govt debt/GDP, stressed twin B/S, low Indian per capita
income level, high fiscal risk from oil, lack of labour & land reform, over
dependence on monsoon for rural economy, which is one of the backbone of Indian
economy)
Another US rating agency S&P is unfazed by Moody’s rating
action on the ground that India’s fiscal position is still weak and these
divergent positions among the global rating agencies (S&P/Fitch/Moody’s) may
continue confuse the market going ahead.
Market may be also concerned about Govt’s incremental fiscal
spending plan to dig out the economy from its deepest slump in the last three
years as Moody’s has clearly warned about any significant fiscal slippages,
which may affect the rating also. On Thursday, the Indian FM was in Singapore,
addressing an investor conference has signalled for possible fiscal deviation
to revive the economy.
But, FM/FMO has taken a U-turn soon after Moody’s rating upgrade
and has assured for fiscal discipline for the sake of rating, although he has
termed Moody’s rating upgrade as “belated”.
FM is very correct; the rating upgrade by Moody’s should come
earlier; but rating agencies are always behind the curve and their credibility
is also at stake, especially after the 2008 GFC. Thus their rating actions are
now basically toothless and market doesn’t care about their ratings action too
much; recent example may be China’s downgrade by S&P; it was surged after
the S&P downgrade; but for EM like India, they still matter to some extent.
Looking ahead, if other major global rating agencies like
S&P and Fitch converge with Moody’s rating action on India, market will
rally more, but if they continue diverge, then expect no big fire work in the
coming days. Market will dictate by earnings, which has to justify the steep
valuation irrespective of any rating action.
Even historically, after any rating upgrade, market nose dived
after 2-3% upside and correct significantly as the news is usually well
anticipated (buy on rumour & sell on facts/news) as reflected in divergence
between actual ratings & CDS implied credit ratings. Market is also
expecting a rate cut on 6th Dec after this rating upgrade.
Moody’s upgrade may help Indian co’s borrowings from overseas at
lower cost/interest, which in turn will help investments (capex), earnings and
fresh job creations; but real borrowing costs was already on the downwards
trend for the Indian cos anticipating for the rating upgrade after India’s jump
in ease of doing business index and Govt’s plan to recaps PSBS.
In that sense, most of the high grade Indian cos, Moody’s
upgrade may not make much difference, but PSBS may benefit a lot after their
rating upgrade to raise funds from overseas for their recaps need. But most
probably, Moody’s will not upgrade all the fragile PSBS blindly solely on the
basis of sovereign rating upgrade for India, it will be bank specific.
Although, this upgrade by Moody’s may be a “historical”
achievement by the Govt just before GJ election and will act as a election
booster amid widespread criticism about economic slowdown & joblessness in
India due to DeMo & GST blues, the Govt/BJP has to fight the GJ elections
on economic realities in the ground.
In that sense, the outcome of GJ election may be vital as the UP
election after DeMo; it may be a 2nd acid test for NAMO on dual
disruptions due to DeMo & GST. Although, there is no doubt about NAMO’s
victory this time too on lack of any credible opposition leader despite RAGA’s
hard work, opinion polls so far indicating that the GJ election fight may be
close this time and may not be a smooth sailing for BJP either!!
Any below expected result for NAMO/BJP from GJ may be a
political risk for the market and thus market will watch it closely. As GST is
implemented in a very complex way with multiple rates and also with high cost
of compliances, SMES/small business/traders are increasingly finding it
difficult and unviable to comply with the same and their business models are at
risk. This public agony may reflect in the voting pattern in GJ this time as
their existence now may be at stake.
Another headwind for the Indian economy may be higher oil &
higher USD; if Brent continues above $65-70 for some months, then India may be
rerated due to concern of trade deficit, CAD & ultimately fiscal slippages.
Imported inflation is a legacy issue of India because of huge
currency depreciation over the last few decades and the whole economy is now
running on currency leverage; we can’t afford USD to go back to the 35-40 level
as in that scenario, export oriented services (outsourcing/techs) will crumble
with the whole economy.
Indian Govt has to quicken its resolution steps for the NPA
fiasco for not only corporates but also for the increasing retail leveraging;
otherwise China types “Minsky Moment” may also come soon as demonstrated by
RCOM’s default.
For any developed economy, central banks’ target dual mandate of
growth & employment with price stability (reasonable inflation). In India
we have no credible job data and thus Govt needs to fix this area and also
generate certain other leading economic data like retail sales, housing starts
etc which may guide the policy makers appropriately rather than trying to drive
the economy without head lights in the night and making political chest
thumping easy in the process.
Assuming average Indian earnings (ex-bonus) at metro cities is
around 50k/pm, still it may not be sufficient for discretionary consumer
spending as almost 80% of it will go to home/personal loan EMI, house rent,
Child education and daily expenses for a small family, leaving very little for
discretionary spending.
At a glance Moody’s
points:
·
Expectation of continuous
progress in economic & institutional reform will ease India’s high debt
burdens or reduce the risk of a sharp increase even in potential downside
conditions.
·
Although Govt is in mid-way of its various reforms and some are
in the design stage, Moody’s believe that those
implemented to date will advance Govt’s objective of fostering strong &
sustainable growth.
·
Moody’s has identified GST, creation of MPC/RBI &
improvement of monetary policy framework, corporate NPL/NPA resolution
mechanism through IBC/NCLT, DeMo, UID Linkage (formalization of economy &
war on black money/corruption/forgery), DBT (to prevent leakage of Govt
subsidy), FRBM Act (fiscal discipline) as key reforms.
·
But Moody’s has also identified lack of labour & land
reforms in India as a major lacuna.
·
Although most of the above reforms (GST/DeMo/IBC-NPA Resolution)
will take time for their full impact and GST/DeMo has already slowed India’s
GDP over the near term, Moody’s believe that GDP growth will moderate to 6.7%
in FY-18 and will further rise towards 7.5% in FY-19 as GST/DeMo blues will
fade over time on Govt’s recent measures to support SMES & exporters with
GST compliance.
·
Although India’s high level
of debt (68% of GDP in 2016) is significantly higher than the Baa median of
44%, Govt can manage it well as almost 90% of those debts are owed by DII and
denominated in INR with average maturity of around 10.65 years. Thus the
overall impact of FX or interest rate volatility is minimal.
·
Moody's expects India's debt-to-GDP
ratio to rise by about 1% this fiscal year, to 69%, as nominal GDP growth has
slowed following DeMo and the implementation of GST. The debt burden will
likely remain broadly stable in the next few years, before falling gradually as
nominal GDP growth continues and revenue-broadening and expenditure efficiency-enhancing
measures take effect; tax compliance will improve after GST.
·
Adoption of a flexible inflation
targeting regime and the formation of MPC have already enhanced the
transparency and efficiency of monetary policy in India. Inflation has declined
markedly and foreign exchange reserves have increased to all-time highs,
creating significant policy buffers to absorb potential shocks.
·
Government’s efforts to reduce corruptions
& formalize economic activity and improve tax collection and administration
through DeMo and GST should contribute to further strengthening of India's
institutions.
·
On the fiscal front, efforts to improve
transparency and accountability, including adoption of a new FRBM Act, are
expected to enhance India's fiscal policy framework and strengthen policy
credibility.
·
Moody’s has identified some major challenges in GST implementation,
muted private capex, slow/tepid resolution of NPA/NPL, lack of progress in land
& labour reform; however Moody’s expect that at least some of these
issues will be addressed in future (over time).
·
Govt support for PSBS recaps
will reduce/mitigate India’s banking sector risks and will support
growth/private capex.
·
Although the PSBS recaps mechanism will modestly
increase Govt’s debt burden by another 0.80% of GDP over two years, it should enable banks to move forward with
NPL/NPA resolution through comprehensive (large scale) write downs and will
increase their lending capacity in future (gradually) and will support private
capex, overall growth & fiscal consolidation.
·
Dual combination of PSBS recaps & corporate NPA resolution
through IBC mechanism will begin to address a key
weakness of India’s sovereign credit profile.
·
Moody’s also sees India’s high public debt burden as a major
constraint to its credit profile and this
headwind is not expected to diminish rapidly with very low income levels (GDP
per capita) relative to its peers. Thus Govt need to enhance development
spending (capex) over the coming years.
·
Moody’s sees Govt measures to
encourage greater formalization of the economy through DeMo & GST will take
time and thus increase in revenue & decrease in expenditure (fiscal
consolidation) will also take significant time to diminish the overall debt
stock.
·
Moody’s may consider further rating upgrade if India will improve its fiscal metrics materially in
combination with durable recovery in investment cycle & private capex.
·
Moody’s may consider rating downgrade if Indian fiscal metrics slippages (deterioration in fiscal
math), health of banking system (PSBS) worsens,
Technically, Nifty Fut-Nov is now in
the EW-5 cycle and has to sustain above 10360-10425 area for any further rally
towards 10535-10575 & 10675 zone; otherwise it will correct again towards 10190-10100
zone.
SGX-NF
Moody’s Full Report: Nov’2017
Moody's upgrades India's government bond rating to
Baa2 from Baa3; changes outlook to stable from positive
Global Credit Research - 16 Nov 2017
New
York, November 16, 2017 -- Moody's Investors Service
("Moody's") has today upgraded the Government of India's local and
foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on
the rating to stable from positive. Moody's has also upgraded India's local
currency senior unsecured rating to Baa2 from Baa3 and its short-term local
currency rating to P-2 from P-3.
The decision to upgrade the ratings is
underpinned by Moody's expectation that continued progress on economic and
institutional reforms will, over time, enhance India's high growth potential
and its large and stable financing base for government debt, and will likely
contribute to a gradual decline in the general government debt burden over the
medium term. In the meantime, while
India's high debt burden remains a constraint on the country's credit profile,
Moody's believes that the reforms put in place have reduced the risk of a sharp
increase in debt, even in potential downside scenarios.
Moody's has also raised India's
long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term
foreign-currency bank deposit ceiling to Baa2 from Baa3. The short-term
foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency
bank deposit ceiling has been raised to P-2 from P-3. The long-term local
currency deposit and bond ceilings remain unchanged at A1.
RATINGS
RATIONALE
RATIONALE
FOR UPGRADING THE RATING TO Baa2
REFORMS
WILL FOSTER SUSTAINABLE GROWTH
The
government is mid-way through a wide-ranging program of economic and
institutional reforms. While
a number of important reforms remain at the design phase, Moody's believes that
those implemented to date will advance the government's objective of
improving the business climate, enhancing productivity, stimulating foreign and
domestic investment, and ultimately fostering strong and sustainable growth.
The reform program will thus complement the existing shock-absorbance capacity
provided by India's strong growth potential and improving global
competitiveness.
Key
elements of the reform program include the
recently-introduced Goods and Services
Tax (GST) which will, among other things, promote productivity by removing
barriers to interstate trade; improvements
to the monetary policy framework; measures
to address the overhang of non-performing loans (NPLs) in the banking system;
and measures such as demonetization, the Aadhaar system of biometric accounts
and targeted delivery of benefits through the Direct Benefit Transfer (DBT)
system intended to reduce informality in the economy. Other important measures which have yet to reach fruition include
planned land and labor market reforms, which rely to a great extent on
cooperation with and between the States.
Most
of these measures will take time for their impact to be seen, and some, such as
the GST and demonetization, have undermined growth over the near term. Moody's
expects real GDP growth to moderate to 6.7% in the fiscal year ending in March
2018 (FY2017). However,
as disruption fades, assisted by recent government measures to support SMEs and
exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018,
with similarly robust levels of growth from FY2019 onward. Longer term, India's
growth potential is significantly higher than most other Baa-rated sovereigns.
AND
PROVIDE GREATER ASSURANCE THAT GOVERNMENT DEBT WILL REMAIN STABLE
Moody's also believes that recent
reforms offer greater confidence that the high
level of public indebtedness which is India's principal credit weakness will
remain stable, even in the event of shocks, and will ultimately decline.
General
government debt stood at 68% of GDP in 2016, significantly higher than the Baa median of 44%. The impact of the
high debt load is already mitigated somewhat by the large pool of private
savings available to finance government debt. Robust domestic demand has
enabled the government to lengthen the maturity of its debt stock over time, with the weighted average maturity on the
outstanding stock of debt now standing at 10.65 years, over 90% of which is
owed to domestic institutions and denominated in rupees. This in turn
lowers the impact of interest rate volatility on debt servicing costs since
gross financing requirements in any given year are moderate.
In addition, however, measures which
increase the degree of formality in the economy, broaden the tax base (as with
the GST), and promote expenditure efficiency through rationalization of
government schemes and better-targeted delivery (as with the DBT system) will
support the expected, though very gradual, improvement in India's fiscal
metrics over time. Moody's expects
India's debt-to-GDP ratio to rise by about 1 percentage point this fiscal year,
to 69%, as nominal GDP growth has slowed following demonetization and the
implementation of GST. The debt burden will likely remain broadly stable in
the next few years, before falling gradually as nominal GDP growth continues
and revenue-broadening and expenditure efficiency-enhancing measures take
effect.
REFORMS
WILL CONTINUE TO STRENGTHEN INDIA'S INSTITUTIONAL FRAMEWORK
Government
efforts to reduce corruption, formalize economic activity and improve tax
collection and administration, including through demonetization and GST, both
illustrate and should contribute to the further strengthening of India's
institutions. On the fiscal front, efforts to
improve transparency and accountability, including through adoption of a new
Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance
India's fiscal policy framework and strengthen policy credibility.
Adoption of a flexible inflation
targeting regime and the formation of a Monetary Policy Committee (MPC) have
already enhanced the transparency and efficiency of monetary policy in India.
Inflation has declined markedly and foreign exchange reserves have increased to
all-time highs, creating significant policy buffers to absorb potential shocks.
Much
remains to be done. Challenges with implementation of the GST, ongoing weakness
of private sector investment, slow progress with resolution of banking sector
asset quality issues, and lack of progress with land and labor reforms at the
national level highlight still material government effectiveness issues.
However, Moody's expects that over time at least some of these issues will be
addressed, resulting in a steady further improvement in India's government
effectiveness and overall institutional framework.
GOVERNMENT
SUPPORT TO PUBLIC SECTOR BANKS MITIGATES BANKING SECTOR RISK, SUPPORTS GROWTH
Recent
announcements of a comprehensive recapitalization of Public Sector Banks (PSBs)
and signs of proactive steps towards a resolution of high NPLs through use of
the Bankruptcy and Insolvency Act 2016 are beginning to address a key weakness
in India's sovereign credit profile.
While
the capital injection will modestly increase the government's debt burden in
the near term (by about 0.8% of GDP over two years), it should enable banks to
move forward with the resolution of NPLs through comprehensive write-downs of
impaired loans and increase lending gradually.
Over the medium term, if met by rising demand for investment and loans, the
measures will help foster more robust growth, in turn supporting fiscal
consolidation.
RATIONALE
FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's
view that, at the Baa2 level, the risks to India's credit profile are broadly
balanced.
The relatively fast pace of growth in
incomes will continue to bolster the economy's shock absorption capacity. And
even in periods of relatively slower growth, as seen recently, stable financing
will mitigate the risk of a sharp deterioration in fiscal metrics.
However,
the high public debt burden remains an important constraint on India's credit
profile relative to peers, notwithstanding the mitigating factors
which support fiscal sustainability. That
constraint is not expected to diminish rapidly, with low income levels
continuing to point to significant development spending needs over the coming
years. Measures to encourage greater formalization of the economy, reduce
expenditure and increase revenues will likely take time to diminish the debt
stock.
WHAT
COULD MOVE THE RATING UP
The rating could face upward pressure
if there were to be a material
strengthening in fiscal metrics, combined with a strong and durable recovery of
the investment cycle, probably supported by significant economic and
institutional reforms. In particular, greater expectation of a sizeable and
sustained reduction in the general government debt burden, through increased
government revenues combined with a reduction in expenditures, would put
positive pressure on the rating. Implementation of key pending reforms,
including land and labor reforms, could put additional upward pressure on the
rating.
WHAT
COULD MOVE THE RATING DOWN
A material deterioration in fiscal metrics and the outlook for general
government fiscal consolidation would put negative pressure on the rating. The
rating could also face downward pressure if the health of the banking system deteriorated significantly or external
vulnerability increased sharply.
GDP per capita (PPP basis, US$): 6,694
(2016 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.1% (2016
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec):
3.9% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -6.4%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.7%
(2016 Actual) (also known as External Balance)
External debt/GDP: 20.4% (2016 Actual)
Level of economic development: High
level of economic resilience
Default history: No default events (on
bonds or loans) have been recorded since 1983.
Moody’s
Report: Nov’2016
Rating
Action:
Moody's Affirms India's Baa3 Rating; Maintains
Positive Outlook
Global Credit
Research - 16 Nov 2016
Singapore,
November 16, 2016 -- Moody's Investors Service
("Moody's") has today affirmed the Government of India's Baa3 issuer
and senior unsecured ratings and maintained the positive outlook on the rating.
Moody's has also affirmed India's P-3 short-term local currency rating.
The decision to maintain a positive
outlook on the Baa3 rating rather than assigning a stable outlook to the rating
at either Baa3 or Baa2 reflects two drivers:
- Economic
and institutional reforms introduced since the positive outlook was assigned,
and potentially forthcoming, continue to offer a reasonable expectation that
India's growth will outperform that of
its peers over the medium term and that further improvements in its
macro-economic and institutional profile will be achieved.
- However,
the reform effort to date has not yet achieved the conditions that would
support an upgrade to Baa2, in particular in accelerating private investment to
support high, stable growth, without which the government's debt burden -- a
key constraint on the rating -- is likely to remain high for a sustained
period.
RATINGS
RATIONALE
Moody's assigned a positive outlook to
India's Baa3 rating in April 2015 to reflect our view that India's policymakers were establishing a framework that would likely
allow the country's growth to continue to outperform that of its peers over the
medium term, and improve its macro-economic, infrastructure and institutional
profile to levels commensurate with a higher rating.
Having
assessed progress made since then, Moody's conclusion is that important steps
have been taken to strengthen India's institutions.
However, thus far, the policy effort has
not delivered a sufficiently clear prospect of the reform dividends --
sustained, high growth and the promise of a reduction in the country's debt
burden -- to support an upgrade.
Moody's
still expects that the measures taken to date, together with further reforms,
will in time achieve those objectives and support an upgrade to Baa2. However,
a further period is needed to assess how the reform program will evolve and the
likely impact of recent and potential future reforms on growth and, over time,
on India's debt burden.
RATIONALE
FOR MAINTAINING THE POSITIVE OUTLOOK
The positive outlook denotes Moody's
expectation that, over time, India's credit metrics will likely shift to levels
consistent with a Baa2 rating. In particular, the outlook reflects our expectation that continued policy reform
implementation will allow balanced growth to support a reduction in the government
debt burden, currently a constraint on India's rating.
A broad range of policies have been
implemented that are conducive to moderate inflation and limited current
account deficits. In addition, a number of policy reforms, if effective, would
lead to higher investment and more efficient savings.
In
particular, the passage and ongoing implementation of a range of economic
reform measures, including the Goods and Services Tax and reform of the
bankruptcy code, points to improvements in government effectiveness. This
assessment is also supported by higher rankings in the World Economic Forum
Global Competitiveness Index and World Bank Worldwide Governance Indicators.
Thus
far, private investment has not picked-up in response to the government's
measures, denoting limited policy effectiveness. Investment has been constrained
by high leverage in some sectors, a relatively unfavorable global environment
and, in some cases, limited access to finance. Businesses are also likely to
have opted to wait for more certainty about the tangible implications of
reforms on their operating environment.
Policy reforms are still relatively
recent with material uncertainty about the effectiveness of measures already
implemented and whether momentum will sustain. The coordination and alignment of objectives between different parts of
the government and the private sector poses implementation challenges.
RATIONALE
FOR AFFIRMING THE Baa3 RATING
India's
core credit strengths are its size and growth potential,
which are amongst the highest of Moody's-rated sovereigns and provide key support
to its Baa3 rating.
Low
incomes constrain India's sovereign credit profile by limiting the government's
revenue base and adding to its social and development spending requirements.
However, incomes are growing. GDP per capita in India was 11% of the US levels
on a Purchasing Power Parity basis in 2015 -- still well below the level in
other Baa-rated sovereigns. But this level marks an increase from 6.6% of US
levels in 2005 and 9.2% in 2010.
In
an environment of lackluster global trade which we expect to continue, India's
very large domestic markets provide a relative competitive advantage compared
to other, smaller and more trade-reliant economies.
As the economy shifts towards higher
value-added and higher productivity growth, incomes will continue to rise
faster than in most other economies. Combined with the very large size of the
economy which prevents high concentration and hence vulnerability to
sector-specific shocks, higher incomes will bolster economic resilience.
India's
significantly reduced and now very low external vulnerability also contributes
to resilience by sheltering the economy from abrupt changes in financing
conditions. The marked
narrowing of current account deficits, to around 0.5-1.5% of GDP, from as high
as nearly 5% of GDP in 2013 is partly accounted for by the lower cost of energy
imports and policy measures that have dis-incentivized gold imports, which
would outlast fluctuations in commodity prices.
Together
with marked increases in Foreign Direct Investment, which now provides full
financing of the current account deficit, this indicates limited external
vulnerability.
However,
India continues to display a number of features which constrain the credit
rating.
First,
year to year, incomes and consumption
remain more vulnerable to negative shocks than in other Baa-rated sovereigns.
With low per capita incomes at around $6,000 on a PPP basis limit, households
have very limited capacity to absorb negative income shocks, whether domestic,
external or weather related.
For
instance, monsoon rains are critical for India's agricultural sector given that
almost half of the country's farm land is not irrigated. Half of India's overall
consumption comes from rural sector and a major portion of rural incomes is
dependent on agriculture.
In
addition, the government's debt burden is high and is likely to remain so for
some time. Room to reduce the deficit quickly is limited. Wages and salaries
account for about 50% of total expenditure with a large, once in 10 years,
increase in central government compensation just implemented. The shift towards
cash-based benefit transfers, if effective, will help reduce some of the
current inefficiencies of current spending. However, more rapid cuts in
spending for instance through reductions in public investment outlays compared
to current plans would have a negative economic impact.
Meanwhile,
on the revenue side, India's
large low-income population limits the government's tax revenue base. At 20.9%
of GDP in 2015, general government revenues were markedly lower than the 27.1%
median for Baa-rated sovereigns. Although the implementation of GST and other
measures aimed at enhancing income declarations and tax collection will help
widen and boost revenues, the effects will only materialize over time and their
magnitude is uncertain so far.
As
a result, the general government deficits will remain sizeable and any
reduction in India's government debt burden will largely rely on robust nominal
GDP growth. We expect that the debt-to-GDP ratio will hover around the current
levels, at 68.6% in 2015, before falling gradually as nominal GDP growth is
sustained and revenue-broadening and expenditure efficiency-enhancing measures
take effect.
The
banking sector also continues to pose material contingent liability risks to
the sovereign.
The
Indian banking system's asset quality, loan loss coverage and capital ratios
remain weak. This poses sovereign credit risks, given the banking sector's role
in financing growth and government deficits, through its purchase of government
securities, and through contingent liabilities in particular related to the
government's ownership of a major portion of the banking sector.
While
recognition of non-performing loans has largely been achieved, lack of
resolution of impaired loans will continue to constrain India's sovereign
credit profile until a viable resolution mechanism is put into place.
WHAT
COULD CHANGE THE RATING UP
We
would consider an upgrade upon evidence that institutional strengthening will
elicit sustained macro-economic stability, higher levels of investment and more
favorable fiscal dynamics.
Evidence
of institutional effectiveness could take several different forms such as a
revival in private investment, improving
infrastructure, and/or additional policies to enhance India's economic and
financial strength. These policies could include land or labor reforms by a
significant number of states, the establishment of a credible and effective
fiscal framework, complemented by measures to reduce expenditures or increase
revenues; tangible progress in the implementation of the bankruptcy law and a
workable strategy to resolve banks' bad assets over the medium term.
WHAT
COULD CHANGE THE RATING DOWN
The
positive outlook indicates that the likelihood of a rating downgrade is very
low. We could revise India's rating outlook to stable if economic, fiscal and
institutional strengthening appeared unlikely, or banking system metrics
remained weak or balance of payments risks rose.
GDP per capita (PPP basis, US$): 6,187
(2015) (also known as Per Capita Income)
Real GDP growth (% change): 7.6% (FY
2015/16 F) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec):
4.8% (FY 2015/16)
Gen. Gov. Financial Balance/GDP: -7.2%
(FY 2015/16) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.1% (FY
2015/16) (also known as External Balance)
External debt/GDP: 23.4% (FY 2015/16)
Level of economic development: High
level of economic resilience
Default history: No default events (on
bonds or loans) have been recorded since 1983.
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