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Last Updated : Oct 20, 2015 02:22 PM IST | Source: CNBC-TV18

India's rating constrained by low per capita income: S&P

If India‘s net debt to gross domestic product (GDP) was less than 60 percent then it would make a strong case for an upgrade, said Kyran Curry, S&P.


The international rating agency Standard & Poor's on Monday affirmed its 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India adding that its outlook continues to remain stable.


Explaining the rationale for not upgrading India, Kyran Curry, S&P told CNBC-TV18 that the constraint was basically the low per capita income, which is currently estimated at around USD 1700 in 2015. The threshold level would be USD 5000, which was a long way yet. However, he was upbeat on India’s growth outlook going forward.

He said it was complicated to assign just one ratio to a sovereign rating and the agency would need to see better fiscal position to merit upgrade. If India’s net debt to gross domestic product (GDP) was less than 60 percent then it would make a strong case for an upgrade, he added.

Below is the transcript of Kyran Curry's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: What will it take for S&P to upgrade India?

A: In India we are expecting to see the momentum for reforms that this government has embarked upon to continue to improve. So in effect we would be looking for an improved fiscal position over time and for the debt burden to come off, these are the key points.

Latha: Given India's external position and the droves of foreign investors who want to buy Indian debt, doesn't it indicate that the market is already pricing in a very high ability of India to pay back its money?

A: That is very true, in fact the interest from foreigners in the government debt is a testament to the amount of confidence that foreigners have in the ability of the Indian government to repay its debt on time and that to us reflects the fact that the government and the sovereign more generally has a very low external borrowing profile. While at the same time we see the track record of the Reserve Bank of India (RBI) in terms of its ability to keep inflation low and on a falling track.

The other thing that investors look for is the very strong democratic traditions in India that says that the policy making is broadly predictable and is effective. However, at the same time the sorts of things that foreign investors told us are concerned about the vulnerabilities that are associated with the government's relatively high debt burden and the fact that the overall income per capita in India remains relatively low compared to peers.

Latha: What would drive the rating upgrade? You would want to see the fiscal deficit at 3 percent. Is there any number that we should look at?

A: It is quite complicated to assign just one ratio to a sovereign in terms of trigger point because sovereigns by the nature can be relatively complex but the sort of factors that we see, the sovereigns are at even higher rating level, tend to have smaller deficits and a much smaller debt burden. So we are on the record now saying if India had net debt that is its gross debt less liquid assets, if that was less than 60 percent of GDP, there would be further upward pressure on the ratings than they currently are.

Sonia: What about the growth picture itself, what are you forecasting in terms of GDP for India and how much of a difference will that make to the ratings?

A: We have got optimistic about the growth outlook in India, we have got 7.4 percent factored in for this year alone. That suggests to us that India is outperforming its close peers. We have observed that despite the fact that there are shortfalls in infrastructure, despite the fact that we hear a lot about regulatory obstacles and land access constraints and land market rigidities -- all of that aside, the growth numbers in India are relatively sound. And we expect that with further reforms in the supply side factors that I just mentioned, it is likely that the growth outlook will be more improved going forward.

However, in terms of the economic peripheral, one of the key constraints are that no matter how strong the growth numbers are that the capita GDP numbers remain relatively low and for the time being that is going to present a continuing constraint on the ratings.

Latha: Per capita incomes don’t rise very quickly, is there a threshold level that you will look at, is it USD 2000, is it USD 3000 what merits an upgrade?

A: In terms of that score, the next threshold is USD 5000 per capita and at the moment in India we estimated it to be broadly USD 1,700 per capita in 2015. So it will take a long time for that score, for that assessment that we have on India's economic credentials to improve by the time. However, against that context if I can just remind you guys that the outlook is relatively good in India and we expect that India will make significant inroad towards raising the per capita GDP pretty soon particularly it is the government's momentum for reform picks up and some of those issues that I mentioned in the supply side constraints are addressed and over time raise the potential growth outlook for India.

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First Published on Oct 20, 2015 08:05 am
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