In no mood: S&P refrains from upgrading India's credit rating

Shattering the Narendra Modi government's hope and the prognosis of many experts, the Standard & Poor's refrained from upgrading India's credit rating.

While it took a favourable view on reforms being undertaken in the country, the ratings agency retained its BBB- rating on Friday.

The announcement came just a week after another international ratings agency, Moody's Investors Service, upgraded India's sovereign bond rating from Baa3 to Baa2 with a stable outlook.

While Union Finance Minister Arun Jaitley held a press conference to take credit for the Moody's upgrade, the decision of S&P to not upgrade India will give his critics a chance to come back hard at him.

S&P last changed India's rating in January 2007, to BBB-, which is the lowest investment grade rating for bonds. In 2009, the ratings agency changed the outlook on India, with the same ratings to 'negative' and upgraded it to 'stable' in 2010.

The year 2012, once again brought a 'negative outlook' from S&P only to be upgraded in 2014 to 'stable' once again. All this shows that S&P feels India has not done enough to get a ratings upgrade since 2007 and only on the basis of its future promising reforms it keeps changing its outlook from 'negative' to 'stable'.

Here's a comparison of the two agencies' readings on the Indian economy:

Moody's

In its ratings on India, the agency chose to overlook the decline in India's GDP growth in the first quarter of the current fiscal to 5.7% from 6.1% in the previous quarter. The agency gave more weightage to structural reforms like the goods and services tax (GST), insolvency and bankruptcy law, Aadhaar and the Direct Benefit Transfer and demonetisation among others.

The Moody's Investors Service upgrade was the first one in 14 years.

S&P

S&P's BBB- rating is just a notch above 'junk' status, and is influenced by high fiscal deficits, a high net general government debt burden, and low per capita income.

The agency views the economic reforms that the government has undertaken over the past two years favourably, but seems to give more importance to final results than mere promises.

The Union government has been lobbying hard with the credit rating agencies to get an upgrade over the past two years. In an unprecedented exercise, the Economic Survey prepared by Arvind Subramanian, the chief economic adviser to the finance ministry, earlier this year questioned the criteria used by international ratings agencies to rate the debt profile of different countries. In a chapter titled 'Facts About India', the Economic Survey specifically questioned biases in perception of ratings agency S&P's while rating India and China.

"China's credit rating was upgraded from A+ to AA- in December 2010 while India's has remained unchanged at BBB-. From 2009 to 2015, China's credit-to-GDP soared from about 142 per cent to 205 per cent and its growth decelerated. The contrast with India's indicators is striking," the Economic Survey read.

It would be interesting to see how the government of India reacts to S&P's decision to keep India's rating where it was – just above 'junk'.

Edited by Joyjeet Das