India’s rating upgrade unlikely

Rohit Joshi and Siddharth Tak/Zee Research Group

Rating agency S&P is unlikely to change its rating for India at the review due this month.

This might bring cheer to the UPA government though it has been working towards a revision. There is a strong view that a status quo is not necessarily bad news in view of the rather grim economic condition in the country.

Recently, DEA (Department of Economic Affairs) Secretary Arvind Mayaram said that the two rating agencies (S&P, Fitch) are scheduled to come here in April to review the sovereign rating of India.

On April 25 last year, S&P lowered its outlook on India’s long term rating from Stable to Negative owing to the concerns of slowing growth and deterioration in the external and fiscal position. While the long term sovereign rating was affirmed at BBB-, S&P then said that the outlook revision indicated “a one-in-three likelihood of a downgrade over the next 24 months.”

First, a look at the turn of events impacting the business and economy in wake of the visit here by S&P: recently Finance Minister Chidambaram stated that fiscal deficit for FY13 would be better than 5.2 per cent of GDP on the back of lower expenditure and better tax collections. During the speech of Union budget 2013-14, he projected that fiscal deficit for FY13 and FY14 would be curtailed at 5.3 per cent and 4.8 per cent levels respectively. As of now, this parameter seems to be making a case for rating upgrade.

Similarly, there is more on the positive side: the slew of reforms unleashed by the government post moving of Chidambaram to the finance ministry had a positive impact on the business sentiments. The structural reforms started with the diesel price hike, capping the limit of subsidised LPG cylinders, allowing FDI in multi brand retail and aviation.

Furthermore, Cabinet cleared proposal related to 49 per cent FDI in insurance along with 26 per cent in the pension funds. Government also partially deregulated diesel prices and sugar sector. It also cleared the proposal to set up the Cabinet Committee on Investment (CCI). Moreover, the Banking and Companies Bill were passed in the winter session.

But a look at the macro economy data on the ground presents a dismal picture. GDP growth slipped to a 15-quarter low 4.5 per cent in Q3FY13 on account of moderating growth of services. While India’s current account deficit hit a record 32.6 billion dollars (6.7 per cent of GDP) in the third quarter of financial year 2012-13 (FY13), in the first ten months of last financial year (FY13), industrial growth stood at 1 per cent against 3.4 per cent in 2011-12.

The output of the eight core sectors contracted 2.5 percent during the month of February (core sector data contracted for the first time since 2005). This data, which was released by the commerce ministry, has nearly a weight of 38 per cent in the Index of Industrial Production (IIP).

Furthermore, after accelerating for the five consecutive months, consumer price index (CPI) for February rose to 10.9 per cent as against 10.8 per cent in January. Owing to high food inflation, CPI has inched up. The headline inflation rate (WPI) rose to 6.84 per cent after falling to a three-year low of 6.62 per cent in January 2013. Although core inflation for February softened to sub 4 per cent level which is in line with RBI’s comfort zone yet the overall wholesale price index (WPI) inflation is still at stubborn levels.

How would S&P assess these facts? A look back showed S&P had upgraded India`s sovereign rating to investment grade in January 2007, nearly 15 years after downgrading it to junk status due to the balance of payments crisis in 1991. S&P had upgraded India to investment grade BBB rating in January 2007, after four years of above nine per cent growth. “The upgrade to investment grade reflects the country`s strong economic prospects and external balance sheet, and its deep capital market, which supports a weak, but improving, fiscal position,” said S&P in its 2007 official release.

Similarly in February 2009, S&P had revised the outlook to “negative”. "The government has implemented various policies (debt relief for farmers and a pay hike for government employees) that increase stress on its fiscal position ahead of the general election, which is expected to be held in May 2009," said S&P in its 2009 official release.

It appears that GDP growth rate, twin deficits (fiscal deficit and current account deficit), inflation, political stability are some of the key parameters which are keenly watched by different rating agencies before assigning sovereign rating to a nation.

Commenting on the parameters involved in assigning sovereign rating, Soumya Kanti Ghosh, senior fellow at ICRIER, said, “It is very difficult to say but I think that fiscal deficit (FD) is given higher weightage by rating agencies. As far as FD is concerned we have done remarkably well. It is estimated to be below 5.2 per cent of GDP in FY13.”

Furthermore, political stability is also given significant weightage in comparison to other macro numbers. “But I don’t think they would change the outlook to stable so quickly hence rating would be retained at same levels,” he predicted.

In sync with Ghosh at ICRIER, Brinda Jagirdar, consulting economist (former chief economist at SBI), said, “First of all it looks at the fiscal deficit figure. Other parameters include Inflation, CAD, and GDP which are now in an acceptable zone. However, it is a worrying fact that growth has slowed down sharply. The government has made some announcements and rating agencies are waiting to see how these announcements are translated into actions.”

At this stage, there is no fear of downgrade by rating agencies. “S&P or any other rating agencies will neither upgrade nor downgrade the sovereign rating of India. As of now, they will still hold the rating and will wait to see how sustainable the changes are? On the fiscal deficit front, the government has allayed the fears of rating agencies by bringing down the deficit levels. They have also presented the roadmap for reducing it further. Furthermore, the current account deficit (CAD) which is currently at unusual levels of 6.7 per cent is expected to narrow down from the fourth quarter itself. The core inflation is coming down and this softening will give room to RBI in slashing rates,” added Jagirdar.

Jagirdar’s thought got an endorsement from Arvind Mohan, Professor of Economics at University of Lucknow, who is also the consultant at the World Bank, averred, “As of now there is no reason for upgrade or downgrade and status quo would be maintained. Reforms were announced but there is no movement seen hence no reason for upgrade. However, relative position of India in comparison to other countries is stronger therefore chances of downgrade are very less.”

Commenting on the point of slow progress made on the action front, Jagirdar, said, “Reform measures taken by government will take time as India is a democratic country. We have never made big bang reforms in the past and that is why they (rating agencies) call us “Elephants” who move slowly.”