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Once feared as ‘junk’, tide turns in India’s favour

The News International Team

Just in a span of 12 months, the tide has turned for India, which was on a the brink of a credit rating downgrade a year ago thanks to the plunging rupee, subdued growth and policy paralysis. Global rating agencies have turned gung-ho on Asia’s third largest economy on anticipation of big-bang reforms by team Modi.

Once a prominent member of the ‘Fragile Five’ club, the India story started selling like hot cakes among the foreign investor community after a business friendly government was voted to power at the Centre in May this year. Fragile Five is a term coined in August of 2013 by a research analyst at Morgan Stanley. It represents emerging market economies which were too reliant on foreign funds to finance their growth ambitions.

Standard and Poor’s (S&P) revised its outlook on India’s ‘BBB-‘ sovereign credit rating to “stable” from “negative” last week. This outlook upgrade was on the back of improvement in India’s external position and growth prospects. ‘BBB-‘is the lowest investment grade. If any country is downgraded from this rating then the country’s sovereign rating earns a “junk” status.

In August 2013, when the Indian rupee slid below 64/USD, S&P had said that it reaffirms its negative outlook on India and also warned of a downgrade. S&P first cut India’s outlook to “negative” in April 2013. Interestingly, S&P is the last of the three main global ratings agencies with a negative outlook on India.

Rival Fitch upgraded India’s outlook from “negative” to “stable” in June 2013. At that time, the government in power, the UPA II, was taking steps to contain India’s sprawling current account deficit and revive economic growth, which has been below 5 percent level. While the rating agency acknowledged the then government’s efforts by maintaining its outlook, it cautioned that structural budget deficits coupled with high public debt could constrain India’s ratings.

With the political scenario becoming stable and strong investment flows, Fitch now expects India’s growth to accelerate to 5.6 percent in the current fiscal and further to 6.5 percent in 2015-16. Fitch has ‘BBB-‘ rating on India. “The new government has started rolling out a number of policies, which may improve the efficiency of the bureaucracy and strengthen the investment climate,” Fitch said in its recent global economic outlook report.

Moody’s has assigned India a ‘Baa3’, the lowest investment-grade rating, with a “stable” outlook. It has not changed its outlook on India in the last one year.

“Higher growth is likely to increase tax revenues and capital inflows. This will reverse some of the weakening that has occurred in India’s fiscal and external position in recent years. India’s macroeconomic outlook will also improve if, as we expect, the authorities implement policies that ease inflationary pressures and increase infrastructure investment,” Moody’s Investors Service said in a report released last month.

Now that all key ratings agencies have stable outlook on India, all eyes are on how soon India will see a ratings upgrade. Finance Secretary Arvind Mayaram is confident of India getting a ratings upgrade from the S&P in the next few months. He said that the government will keep surprising with positive reforms and India’s GDP growth in FY15 will be over 5.5 percent.

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