Nomura India finds the timing of S&P Global Ratings' upgradation of India outlook to 'Positive' from 'Neutral' a bit puzzling, as it feels the outcome of the ongoing Lok Sabha elections 2024 would have a material impact on India’s macro prospects, especially if there is a change in the government.
If the incumbent National Democratic Alliance (NDA) returns to power, with the ruling Bharatiya Janata Party (BJP) securing a simple majority – as is the case currently, and as is widely anticipated – then S&P’s base case for India should play out and an eventual rating upgrade is likely.
"However, other political scenarios could make the outlook hazier," it said while calling S&P's decision "the curious dismissal of political risks."
Nomura India said its recent survey among institutional investors suggested that if the BJP loses majority, there is expectation of some erosion in growth and fiscal consolidation prospects.
"And under the scenario of the opposition INDI alliance winning, the majority of participants saw medium-term growth fall below 6.5 per cent, serious risk of fiscal slip and even possibility of continued policy rate hikes by the RBI. Their concerns are not unfounded in our view – as we flagged in our comparison of BJP and Indian National Congress (INC) manifestoes , the latter was markedly populist and reflationary," it said.
Nomura said its back-of-envelope estimates of some of the poll promises suggested the risk of a major derailment of fiscal consolidation. "Hence, while the timing of S&P’s rating action might suggest apolitical assessment on its part, in our view, the sharp contrast in economic visions of the main national parties means that the election outcome is likely to be relevant to India’s sovereign rating outlook," it said.
For now, S&P said regardless of the election outcome, it expects broad continuity in economic reforms and fiscal policies.