NAMO’s positive affect in India Regaining ‘Stable’ rating from Standard & Poor rating Agency

Today on 26th September, 2014 the rating agency Standard & poor has upgraded its outlook on India’s credit market from Negative to Stable, after more than two years of humiliating downgraded “negative” outlook. This very step is itself indicating the optimistic mindset towards the revival of Asia’s third largest economy which is the result of Prime Minister Narendra Modi’s highly ambitious national agenda of administrative, economic and fiscal reforms by introducing a general sales tax, speedy consent of major projects, encouraging foreign investment by renewing strained ties with foreign investors and boost infrastructure project to revive economy.

We all know that nearly two and half year before in April 2012, S&P had downgraded its outlook on India’s credit rating from “BBB-minus to “negative” thus left India on the verge of “junk” rating. S&P cited that India’s large fiscal deficit, high inflation, large number of prevailing corruption cases, a negative perception of growth towards the economic reforms introduced by then Congress-led government due to political restrictions are the main reasons of negative outlook towards India’s credit market. Thus, this resulted in plunging investor confidence and Indian rupee losses shine in international market. In August 2013, Indian rupee recorded the worst slump in two decades to near 69 to the dollar.

But ever since the inception of Modi’s government i.e., 26 th May, 2014 the confidence of foreign investors has returned to India and assuring to stimulate investments, boost economic growth and a hope to bring back the shine to Indian rupee.

And, due to this positivity and optimism towards the overall economic development, Indian share market is on the course of experiencing record high this year, bond market is also on the path of comeback and performing record high than last year. And, in the first quarter of FY 2014 – 15 i.e., from April to June, Indian economy recorded an annualized growth of 5.7 percent after suffering a setback of economic growth of 5 percent for nearly two years. Thus, with all the assurances given by Modi’s reform agenda, India’s economic and fiscal condition is recovering fast from the worst economic and fiscal turmoil in two decades. In addition to that, India’s finance minister said that he is optimistic about 5.5 percent economic growth for this fiscal year (FY 2014 – 15).

With the rating upgrade, S&P advised government to resolve development roadblocks such as restriction on energy supply. S&P also said that their upgrading outlook for the next 24 months towards India’s credit market signifies that the rating agency is positive about the implementation of administrative, economic and fiscal reforms due to strong mandates of Modi’s government i.e., returning to India’s lost development potential, consolidation of its fiscal accounts and granting permission to Reserve Bank of India to formulate efficient fiscal policies to control inflation. Furthermore, S&P also stated that if India achieves its return growth then this would defend another rating upgrade.

And, all the three major credit agencies had given India a rating of the lowest investment grade with a "stable" outlook and thus India has the same “stable” outlook like its fellow BRICS countries i.e., Brazil, China, South Africa and Russia.

Modi’s government is facing key challenges in fulfilling its election campaign promises to stimulate foreign investment, improve infrastructure and narrowing India’s current account deficit to 4.1 percent of gross domestic product by the end of the financial years 2014 – 15. And, this can be achieved with the increment of tax revenue and partly privatization of some of the state-run companies i.e., Coal India.

S&P also cited that India's political positioning in the world politics and improvement in the current account deficit are also some other macroeconomic factors which resulted in positive outlook towards India’s credit rating. Thus, these measures revived the trust of foreign investors in India.

Furthermore, S&P also said that the major constraints for India’s low credit rating is its “Low wealth level” means small percentage of citizens paying taxes to reduce debt burden and “Weak public finance” means inferior degree of flexibility in fiscal policies due to deficiency of good infrastructure and poor administration services. S&P warned that these constraints could lower India’s credit rating and thus they will watch India’s performance for next 24 months.