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.
On 14 November 2016, a rating committee was called to discuss the
rating of the Government of India. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to
external event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Marie Diron
Associate Managing Director
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
