Here is some good news for the NDA Government. Europe-based ARC Ratings SA (ARC) has assigned India sovereign rating, which is a shade better than what has been issued by the big three global credit ratings agencies.
In its maiden sovereign rating assignment, ARC has assigned ‘BBB+’ long-term foreign currency issuer rating to India. Further, it also assigned ‘A-’ (stable outlook) long-term local currency issuer to the country. The outlook on both the ratings is stable.
According to ARC, an entity rated ‘BBB+’ exhibits an adequate capacity to meet its financial commitments. However, adverse economic conditions or suddenly changing circumstances are more likely to lead to a weakened capacity to the obligor to meet its financial commitments.
An entity rated ‘A’ has quite a strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions when compared to obligors in highest-rated categories.
Global credit rating agencies, Standard & Poor’s and Fitch have a ‘BBB-‘ (stable outlook) — the lowest investment grade rating — sovereign rating on India. Moody’s too has lowest investment grade rating on the country of ‘Baa3’ (stable outlook).
Among the rating considerations mentioned by ARC for assigning ‘BBB+’ rating include its expectation that India’s growth will accelerate from an annual average of 4.8 per cent in 2012-14 to 6.5 per cent 2015-17.
This will be driven by a recovery in corporate investment, robust domestic consumption and the new Government’s aggressive growth-enhancing structural reform programme.
India’s key debt ratios are on a downward trajectory and is supported by a favourable currency composition (94 per cent local currency), maturity structure (average maturity over nine years), and ownership base (limited foreign holdings of local currency debt) relative to BBB-rated emerging market peers.
However, prospects for fiscal consolidation are limited, although we expect budget deficits to improve marginally to 6.5 per cent of GDP in 2015-17, down from an average of 7.6 per cent in 2010-14.
India’s current account deficit improved from 4.7 per cent of GDP in 2012 to 2 per cent in 2014, limiting the economy’s exposure to external financing conditions, and expected to continue to tighten in 2015-16, thanks, in part, to low oil prices.
ARC said the corporate sector has high external leverage and banks are encumbered by an overhang of bad assets which has impaired credit growth. It expects domestic credit conditions to ease gradually in 2015-16 but to lag growth.
"India’s ratings carry stable outlooks, and take into consideration our expectations for the behaviour of policies that will unleash faster growth, a more investment-friendly business environment, and greater competitiveness, while also addressing fiscal shortcomings," ARC said in a statement.