S&P gives stable rating to India: Will Narendra Modi Govt stand up to it?

In a major boost to Prime Minister Narendra Modi ahead of his arrival in the US, Standard & Poor's on Friday raised India's credit rating outlook to stable on the back of strong political mandate helping fiscal and economic reforms.

S&P, after a gap of two years, has improved India's sovereign credit rating outlook from negative to stable indicating the possibility of a rating upgrade. This reflects India under the leadership of Narendra Modi has started treading its path of recovery.

What S&P said?

"Our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms," S&P said in a statement.

The present government, S&P said "will remedy, to varying degrees, the growth impediments--policy paralysis, energy supply bottlenecks, and administrative obstacles. The government's actions will likely add momentum to the incipient cyclical upswing evident in the economy".

The agency currently has a 'BBB-/A-3' rating on India.

Major boost to Indian economy

S&P said it could raise the rating if the economy reverts to a GDP trend growth of 5.5 percent and there are improvements in fiscal, external or inflation metrics.

S&P had earlier in April 2012 lowered India's rating outlook to negative in view of inability of the government under the previous UPA government to take up reform measures and declining investor confidence.

The outlook revision gave a boost to the stock markets with the BSE Sensex shooting up by 158 points to 26,626.32.

What has triggered this changed perception?

Pursuant to landslide victory of BJP-led NDA in May 2014, there has been an upsurge in investor confidence with stock markets rallying 19 per cent and increase in foreign investment. Also growth picked up to a nine-quarter high of 5.7 per cent in April-June period.

S&P said the stable outlook for the next 24 months reflects the agency's view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the RBI to carry out effective monetary policy.

The new administration would adhere to its stated fiscal consolidation programme, S&P said, adding that planned revenues may not fully materialise and subsidy cuts may be delayed.

After taking over as Prime Minister in May, Modi has launched a host of initiatives, including 'Make in India' campaign to improve business environment and fetch more FDI.

S&P expects improved fiscal performance in the medium term primarily from revenue-side improvements brought about by the planned introduction of a national Goods and Services Tax (GST) and administrative efforts to expand the tax base.

What are experts saying?

Commenting on the action, Finance Secretary Arvind Mayaram said the Indian economy can grow by more than 5.5 per cent in the current fiscal year.

"We are satisfied that the credit rating agency has acknowledged the steps that government has taken to improve the economy and specially bring the investment climate back and therefore the growth cycle back," he added.

SBI Chairperson Arundhati Bhattacharya said S&P's action is a reflection of India's sound external position, supported by robust capital inflows and a benign CAD.

S&P's revision comes at a perfect time

The timing of this revision in outlook could not have been better as it came ahead of Modi's most anticipated and high profile visit to the US, which among things is aimed at procuring investments. PM Modi is scheduled to meet top US corporates and is likely invite them to come 'Make In India'.

Full credit for this change in perception must be given to the wave of optimism the Narendra Modi-led government has brought. The current government's strong mandate has enabled it to implement many of its administrative, fiscal, and economic reforms and will continue doing that.

After change in leadership the corporates have shed their fears and are once showing their willingness to invest in India. Reformatory steps taken by Narendra Modi's regime has sent positive signals in the minds of global investors, who were unhappy with erstwhile UPA government's restrictions over ease of doing business and trade in India.

S&P, however, cautioned that it could lower the rating in case the government's structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve.

It also highlighted key constraints to improved rating were "low wealth level" and "weak public finances". Thus, one looks at the new regime with great hope that it will continue to take reformatory measures that will increase India's position in the global market.

Well, the rating agency's confidence has given a much needed push to the ailing Indian economy, but it will be interesting to see how Narendra Modi government lives to the expectations of 1.25 billion Indians.