Policy reforms more crucial than political party for Indian economy
Moneylife Digital Team 15 April 2014

Direction and pace of policy reforms in India, more than which political party takes control, can affect the ratings on the sovereign, says ratings agency S&P

Direction and pace of policy reforms in India, more than which political party takes control after the general election can affect the ratings on the sovereign, says Standard & Poor's (S&P) Ratings Services in two reports published Tuesday.

"We believe that 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."

According to the reports, titled "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," 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 says the elections and subsequent policy actions could decide if the sovereign rating remains investment grade (at present unsolicited ratings: BBB-/Negative/A-3). 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, it added.

"We believe a decisive mandate can create an environment for speedy resolution of policy bottlenecks and reforms, and improve private sector investments," said S&P'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 as decision-making gets hampered, curbing revival in the investment cycle and derailing growth."

India's 16th general elections, where more than 800 million people are eligible to vote, are underway. To claim the right to form a new government, a single political party or a coalition of political parties needs to win 272 out of 543 seats.

"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," Dangra said.

The new government's policy directions will set the medium-term growth expectations and long-term structural factors for the economy. In our opinion, structural reforms are essential for India to return to healthier economic growth of above 6% on a sustainable basis and stimulate investments, the ratings agency added.

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