India's lower income level, weaker fiscal position weigh on its sovereign credit metrics

India's low income levels and weak fiscal and debt indicators constrain the country's credit profile.

However, the political stability following the general elections last year has created a conducive environment for reforms, which could address these weaknesses. India's sovereign indicators therefore stand a better chance of closing the gap with those of similarly rated sovereigns, said Standard & Poor's Ratings Services today in a report titled, Meeting Reforms Expectations Is Key To Maintaining Investment-Grade Ratings On India.

"Higher growth in real per capita GDP, stronger fiscal and debt metrics, and an improved external position or monetary policy setting are needed to enhance the sovereign's creditworthiness," said Standard & Poor's credit analyst Agost Benard. "The government's ability to fulfill its promises on key reforms will therefore be critical."

The report considers Brazil, Colombia, Indonesia, the Philippines, South Africa, and Uruguay as India's peers. We assess India's sovereign credit metrics as weak for the 'BBB' rating category. The average income in India (unsolicited rating BBB-/Stable/A-3) is significantly below that of its peers and the government is also more heavily indebted. The country's stronger external balance sheet only partly offsets these weaknesses. We see institutional and governance effectiveness in the country as a neutral credit factor. We also assess India's monetary flexibility as moderately supportive of the sovereign's creditworthiness.

"We expect the government's fiscal consolidation plan of progressively lower deficits to ease the debt and interest burden. However, improvements in India's weak fiscal balance sheet are likely tobe gradual," said Benard.

The report notes that India's high savings and investment rates, together with the country's favorable demographics, with 87% of the population aged 54 or below, put the country in good stead to achieve fast growth. Standard & Poor's timates India's real GDP growth to near 7% by 2017. However, India's projected per capita GDP of US$2,404 by 2017 will still leave the country's wealth at about one-third of the average of similarly rated countries.

India's strong external balance sheet is a support for the sovereign rating, the report says. Given India's already strong external credit metrics, we believe any further improvement in external liquidity or balance sheet is unlikely to lead to a higher credit rating.