Why S&P rates India at 'BBB'

US financial services company Standard & Poor's (S&P)   rated India at BBB, the lowest investment grade rating for bonds in January 2007 and gave an outlook of 'stable'.

It changed the outlook to negative in 2009 and raised it to stable in 2010.
In 2012, the outlook was again lowered to negative, which was raised to stable soon after the Narendra Modi government assumed office in 2014.

Government circles were disappointed with S&P on Friday because Moody's Investors Service upgraded India's sovereign credit rating for the first time in nearly 14 years on November 17.

Moody's lifted India's rating to Baa2 from Baa3 - one notch higher than S&P's current rating- and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced.

It said India's continued progress on economic and institutional reforms would boost the country's growth potential.  Listing the reasons for its ratings, S&P said India's confidence and GDP growth in the year 2017 were hit by the sudden demonetisation exercise and the introduction of the GST also led to some one-off teething problems that have dampened growth.

Secondly, S&P said India's ratings are constrained by India's low wealth levels, measured by GDP per capita, which is estimated at close to $2,000 in 2017. But this is the lowest of all investment-grade sovereigns.

Thirdly, S&P found that the country's fiscal challenges reflect the revenue under performance as compared with most peers at the rating level. India's general government revenue, at an estimated 22% of 2017 GDP, is low as compared with peer sovereigns.

S&P also estimated that public sector banks will need a capital infusion of about $30 billion to need capital to make large haircuts on loans to viable stressed projects and meet the rising requirement of Basel III capital norms. It noted that the government had promised capital infusion but the public sector banks had weaker profitability.

Only a month ago, S&P had said that India needs to improve its fiscal position for a rating upgrade. Since S&P's last rating, the government had announced a recapitalisation plan for the public sector banks and tried to ease the pain points in the GST rollout.

Moody's cited the NDA government's "wide-ranging program of economic and institutional reforms" among the reasons for the move.