DBRS Morningstar assigns BBB rating to India

By Morningstar |  17-06-20 | 

Global rating agency DBRS Morningstar has assigned a 'BBB' sovereign credit rating to India, Negative trend.

A BBB rating denotes adequate credit quality. As per the ratings terminology, A BBB rating means that "the capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events".

The Negative trend reflects the high degree of uncertainty around the magnitude and duration of the coronavirus shock.

The assignment of the BBB rating to India is supported by DBRS Morningstar's assessment that structural factors of the Indian economy – relatively high domestic savings and favorable demographics – underpin the country's growth potential.

Favorable growth and interest rate dynamics are likely to support sustainable public debt dynamics over the medium term. Exchange rate flexibility and a relatively low level of external debt also reduce external vulnerabilities.

These underlying strengths are balanced by several challenges, including India’s large fiscal deficit, structural impediments to faster productivity growth, and asset quality concerns within the financial sector.

Even before the coronavirus outbreak, the Indian economy was experiencing a slowdown with GDP growth declining to a projected 4.9% in 2019-20 fiscal, its slowest pace in the last decade.

The slowdown is led by decelerating consumption and investment growth owing to weak income growth, stresses in the financial sector and weaker global demand.

In addition to uncertainty on the spread of coronavirus, the Indian economy is simultaneously being subjected to demand destruction from the pandemic and tightening financial conditions due to stresses in some private-sector banks and non-banking financial companies (NBFCs).

On the other hand, India may experience a positive supply shock due to lower crude prices and may benefit from firms relocating from China to India.

India's medium-term prospects will depend in part on the government's ability to improve the investment climate.

Encouragingly, the government has begun tackling some of the structural issues.

These include administrative steps to improve the investment climate by simplifying business regulation, easing restrictions on foreign direct investment, amending regulations to make the financial system more efficient, expanding the scope of the insolvency and bankruptcy proceedings to cover NBFCs, and reducing corporate tax rates.

In response to COVID-19, the government has announced a relief package of Rs 20.9 lakh crore, amounting to about 10.3% of GDP, that aims to support the economy and dampen the impact of the pandemic.

The relief measures are a combination of direct fiscal support, credit guarantees and subsidized loans, monetary policy actions including rate cuts and liquidity injection, and regulatory and structural policy measures.

The direct fiscal support estimated at Rs 1.9 lakh crore (around 1% of GDP), primarily targets low income households and migrant laborers through distribution of free food grains and income support measures such as immediate cash transfers to Jan Dhan-linked bank accounts.

While the direct fiscal support of these measures on the budget is limited to 1% of GDP, the center's deficit could see a significant overshoot to over 6.5% of GDP from 3.5% budgeted.

The ballooning of the fiscal deficit would be due to tax buoyancy being impacted by lower growth and lower non-tax revenues arising from lower-than-expected receipts coming from divestments and telecom spectrum auctions, which more than offset the higher excise taxes on petroleum products and cuts in government dearness allowances.

The projections.

India's FY21 (April 2020 to March 2021) growth outlook has markedly deteriorated. Social-distancing measures, combined with weaker labour market conditions and lower remittances, will adversely affect consumption.

The outlook for investment is also poor: the domestic shutdown and weak business confidence added to the existing issues of financial market stress, it said.

The outbreak of coronavirus and the ensuing nationwide lockdown is having severe impact on the Indian economy. The shock will have a severe negative impact on economic activity in the first half of the year.

The latest projections from the Ministry of Finance forecast a contraction of 10% in the first quarter of this fiscal year before recovering in the second half of the year, thereby resulting in growth of 2% for FY21.

The IMF's World Economic Outlook (April 2020), estimates growth to slow to 1.9% in FY21 before recovering to 7.5% in FY22.

To listen to Rohini Malkani, Senior Vice President – Global Sovereign Ratings, speak on the several levers of the Indian economy, join the webinar on June 25 at 5 pm. Register here.

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