Pace of policy reforms will affect India’s sovereign ratings: S&P

The elections and subsequent policy actions will determine if the sovereign rating remains investment grade, global ratings agency Standard & Poor’s said on Tuesday.

The direction and pace of policy reforms, more than which political party will come to power after the Lok Sabha elections, will affect India’s sovereign ratings, global ratings agency Standard & Poor’s said on Tuesday.

“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 will determine if the sovereign rating remains investment grade (unsolicited ratings: BBB-/Negative/A-3).

The outcome of India's general election can provide an insight into the political stability, ability and willingness of the new government to implement reforms for boosting economic growth, S&P said in two reports released on Tuesday. “We believe a decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments,” said Standard & Poor's corporate credit analyst Abhishek Dangra. “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 if it hampers decision-making, curbing revival in the investment cycle and derailing growth.”

The two reports are: ‘India's Election Is Pivotal For Its Sovereign Creditworthiness’ and ‘The New Government's Reform Policies Will Be Critical To The Credit Profile Of Indian Corporates And Banks’.

“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 benefitting from uplift due to government support will likely be downgraded, if we lower the sovereign rating,” an S&P release on the reports 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,” Mr. Dangra said.