Decisive poll mandate critical for Indian economy: S&P
15 April 2014
Rating agency Standard & Poor's today reiterated the obvious, saying that a decisive mandate in India's ongoing general elections would lay the foundation for strong economic growth in the medium term, but a weak government would derail growth.
"We believe a decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments," S&P's corporate credit analyst Abhishek Dangra said.
"This can lay the foundation for India's return to a stronger and healthier growth phase in the medium-term.
"Conversely, a fragile government could further delay critical reforms, as decision-making gets hampered, curbing revival in the investment cycle and derailing growth."
S&P stressed that India's sovereign ratings would be affected more by the direction and pace of policy reforms than by the political party that takes control after the general election. The new government's reform policies will be critical to the credit profile of Indian corporates and banks.
"The direction and pace of policy reforms, more than which political party takes control, can affect the ratings on the sovereign," the agency said in its latest report.
"We believe that the current political landscape in India suggests that no single party could win an outright majority," said S&P's sovereign credit analyst Kim Eng Tan.
"An important factor is how fragmented the government will be. The more parties involved in the next coalition government, the more likely policies will be incoherent and less supportive of credit attributes."
The elections and subsequent policy actions could decide if the sovereign rating remains investment grade (unsolicited ratings: BBB-/Negative/A-3), S&P said.
"If we revise our sovereign outlook to stable, those negative outlooks on banks and corporate entities, which reflect the sovereign outlook, could also be revised to stable.
"Ratings on government-related entities (GREs), companies rated above the sovereign, and banks that are capped at the sovereign rating level or benefiting from uplift due to government support will likely be downgraded, if we lower the sovereign rating," S&P said.
"In our view, the infrastructure, power, metals and mining, and petroleum sectors are more exposed to risks from development in government policies affecting corporate performance and banks' asset quality and capitalization needs," Dangra said.
The new government's policy directions will set the medium-term growth expectations and long-term structural factors for the economy.
"In our opinion, structural reforms are essential for India to return to healthier economic growth of above 6% on a sustainable basis and stimulate investments," the agency's report said.