Dagong Global Credit Rating Co., Ltd.
March 23, 2018
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Republic of India (“India”) at BBB, each with a stable outlook. The ongoing implementation of structural reform in India is conducive to the release of economic vitality. The expansion of the tax base and fiscal consolidation policies will help improve government finances. A good debt structure and sufficient foreign exchange reserves will ensure the stability of the government’s solvency in local and foreign currency.
The key reasons for maintaining the sovereign credit ratings of India are as follows:
1. The political and legal environment is good, although the banking system is not sound enough. Strengthening of the dominant position of the ruling party in the parliament will help increase the chances of Prime Minister Modi’s re-election in 2019, thereby guaranteeing the efficacy and continuity of structural reforms. However, the high non-performing loans of public sector banks and the serious shortage of their own capital have constrained India’s investment credit growth and financial stability, dragging down the development of the real economy.
2. An increase in domestic demand has contributed to the rapid growth of the short-term economy, thus providing greater growth potential. The sharp increase in civil servants’ pay and growth of farmers' incomes will help stimulate consumption. Loose monetary policies, measures to attract foreign investment, and large-scale infrastructure projects will promote investment growth. India's economic growth is expected to rise to 7.4% and 7.6% in 2018 and 2019, respectively. In the medium and long term, the "demographic dividend" has obvious advantages. Goods and Services Tax (GST) reforms and measures to attract foreign investment, as well as strengthening infrastructure construction and other such efforts, will instill India with greater growth potential. It is projected that the economic growth rate of India will average 7.6% over the next five years.
3. The government's fiscal deficit will gradually narrow and repayment sources will remain stable. In the short term, the GST will help broaden the tax base, and the government will continue following its policy on fiscal consolidation policies to increase the efficiency of public spending. It is forecasted that the fiscal deficit of India’s general government will narrow to 6.5% and 6.4% in 2018 and 2019 respectively while the ratio of government financing needs to fiscal revenues at the same period will fall to 54.5% and 52.7% respectively.
4. The debt burden has entered a downward channel and the government’s solvency has remained stable. In view of solid economic growth and the gradual narrowing of the fiscal deficit, it is expected that the debt burden of India’s general government will fall to 67.9% and 66.9% respectively in 2018 and 2019. Short-term debt accounts only for about 8% of government’s total debt, thus pressure from short-term debt repayment is reduced and solvency in local currency remains stable. As of September 2017, the total external debt burden of India was only 20.3%, and the coverage of international reserves on short-term external debt increased to 4.3 times. Despite slight increases in the current account deficit and devaluation pressure of the rupee, abundant foreign exchange reserves will ensure the stability of the government's foreign-debt solvency.
In the short term, India’s economic growth will accelerate, as driven by domestic demand. The expanded tax base and fiscal consolidation have led to a gradual improvement in India’s fiscal position. The government’s debt burden has slowly entered a downward path. That, coupled with an optimized debt structure and abundant foreign exchange reserves, renders government solvency stable. Taking all these factors into consideration, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of India for the next one to two years.