Rating agency Standard and Poor’s (S&P’s) on Monday kept India’s sovereign rating unchanged

Rating agency Standard and Poor’s (S&P’s) on Monday kept India’s sovereign rating unchanged at the lowest investment grade with a stable outlook.

S&P said it does not expect to change India’s rating this year or next year based on its current set of forecasts, but warned that pressure on the rating could emerge again.

“Downward pressure on the ratings could re-emerge if growth disappoints (perhaps as a result of a stalling of reforms), if, contrary to our expectations, the new monetary council is not effective in achieving its targets, or if the external liquidity position of the nation deteriorates more than we currently expect,” it said.

On the contrary, ratings could improve if the government’s reforms markedly improve its general government fiscal situation and the level of net general government debt, so that it falls below 60% of gross domestic product (GDP).

Besides S&P, Fitch also has a “stable” outlook on India while Moody’s raised it to “positive” in April.

S&P projected the economy to grow at 7.4% in 2015 and at an average 8% over 2015-20. “While India experiences some volatility in its terms of trade, we expect it to record a modest current account deficit of 1.4% (of GDP) in 2015 and similar levels through 2018. We project that usable reserves will stand at $357 billion (or seven-and-a-half months of current account payments) at year-end 2015,” it added.

India’s economy grew 7% in the first quarter of 2015-16. The finance ministry expects it to pick up and grow in excess of 7.5%. S&P said while India’s growth is outperforming that of its peers and is picking up modestly, it believes that domestic supply-side factors will increasingly bind economic performance.

“We note that the government has little ability to undertake countercyclical fiscal policy given its current debt load,” it added.

The rating agency said India’s sound external position and inclusive policymaking traditions balance the vulnerabilities stemming from its low per capita income and weak public finances.

“Although we expect the new administration to pursue its stated fiscal consolidation programme, we foresee that planned revenues may not fully materialize and subsidy cuts may be delayed,” it added.

S&P said the current ratings of India reflect the country’s sound external profile and improved monetary credibility. “These factors, combined with strong democratic institutions and a free press, both of which yield policy stability and predictability, underpin the investment-grade rating on India. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and weak public finances,” it added.

The rating agency estimated India’s GDP per capita to grow 6% to $1,700 in 2015, terming it a “rating constraint”. Debt load and India’s weak public finances are another ratings constraint, S&P said. “India has a long history of high general government fiscal deficits (averaging 8.8% of GDP over the past 20 years and 7.4% in the past five years). Although we expect the new administration to pursue its stated fiscal consolidation program, we foresee that planned revenues may not fully materialize and subsidy cuts may be delayed. In the medium term, we expect improved fiscal performance primarily from revenue-side improvements, brought about by the planned introduction of the general sales tax and administrative efforts to expand the tax base,” it added.

The rating agency said given the weaker profitability of public-sector banks, it estimates capital infusion needs at $35 billion (1.6% of GDP) over 2016-2019 to meet Basel III capital norms. Of this, the government has already committed $11 billion (0.5% of GDP). “The government may have to increase the allocation if the banks are not able to secure capital from alternative sources, such as equity markets, additional tier-1 bonds and insurance companies,” it said.