The direction and pace of policy reforms of the new government to be formed in May after the completion of ongoing general elections will determine credit rating of India, global rating agency Standard & Poor’s (S&P) said on Tuesday.
“The direction and pace of policy reforms, more than which political party takes control, can affect the ratings on the sovereign,” the rating agency.
At present, rating of India is investment grade ‘BBB-‘ with negative outlook.
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, it said.
The results of general elections would be announced on May 16. To claim the right to form a new government, a single political party or a coalition of political parties require 272 out of 543 Lok Sabha seats.
“We believe that the current political landscape in India suggests that no single party could win an outright majority,” said S&P sovereign credit analyst Kim Eng Tan.
An important factor is how fragmented the government will be, it said, adding, the more parties involved in the next coalition government, the more likely policies will be incoherent and less supportive of credit attributes.
“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,” it said.
A decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments, it 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 may get hampered, curbing revival in the investment cycle and derailing growth, it added.
“In our opinion, structural reforms are essential for India to return to healthier economic growth of above 6 percent on a sustainable basis and stimulate investments,” it said.
In a report titled ‘India’s election is pivotal for its sovereign creditworthiness’, S&P also said the elections and subsequent policy actions could decide if the sovereign rating remains investment grade.
The agency, along with its global peer Fitch, had threatened to downgrade India to the junk status for the incumbent government’s policy challenges including difficulties in narrowing fiscal deficit, struggling growth and a sense of policy paralysis.
This would have made cost of borrowing for the government difficult and a costly affair.
“We believe a decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments,” its corporate credit analyst Abhishek Dangra said.
According to Dangra, the infrastructure, power, metals and mining, and petroleum sectors are more exposed to risks from development in government policies.
Last Friday Fitch reaffirmed its rating with a stable outlook (BBB-).