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Will India receive a credit upgrade?
Wed, 25 Feb Pre-Open

During the tenure of the erstwhile UPA government, India's credit rating was substantially downgraded by credit rating agencies. Policy paralysis, corruption and a slowdown in economic growth only made matters worse. So bad was the situation that S&P had been threatening to further downgrade India's rating to junk status.

But a lot has happened since then. For starters, the election of the Modi government has been well received as this government is expected to come out with reforms and get India's growth going. This prompted S&P to upgrade India's rating to stable from negative. However, although sentiment has been positive, the credit rating agency is no hurry to give another upgrade to India. Indeed, as reported in a leading business daily, according to S&P, improvements in India's weak fiscal balance sheet are likely to be gradual. Hence, this is unlikely to lead to a rating upgrade in the next three to five years.

As per Mint, India's last 10-year fiscal deficit (both state and centre) averaged 8% of GDP. In contrast, those for its peers such as Indonesia and Brazil have stood between 0.3% and 7% during the same period. There are some positives though. For one, most of India's debt is dominated in rupees. And so the risk of currency fluctuations to that extent is low. The other is that India boasts of high domestic savings and investment rates among the peers. As reported in the Mint, these have averaged at around 30% and 32% of GDP respectively over the past 10 years.Clearly, the message here is fiscal prudence. The Modi government, for its part, has laid a framework to reduce this fiscal deficit in the coming years. While this is certainly a step in the right direction, it will be interesting to see whether the government will be able to actually stick to these targets. The critical factor at the end of the day will be not just introducing reforms but also implementing them. Moreover, as far as expenditure goes, the focus will have to be on productive expenses that can add to the country's GDP rather than unproductive ones such as subsidies. It will be these elements that will not only take India's growth to the next level, but will also ease off quite a lot of pressure on government finances.

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