Credit assessor and ratings agency Standard and Poors (S&P) Global Ratings recently affirmed India’s rating of ‘BBB minus’, the lowest investment grade rating with a stable outlook. This has come as a disappointment to the India Finance Ministry, which believed that India has started out on the path of reforms with the Goods and Services Tax being ushered in from the next financial year. This grade was awarded to India way back in 2014 due to the high government debt created by the UPA regime. S&P notes that unless the government debt is brought down to 60 percent of the GDP, which is around $2 trillion at present, the agency will not give positive ratings to India. Will this have a bearing on SMBs and startups? Yes, it will!
- Borrowing costs will not come down.
- It will increase commodity prices.
- Investors will stay away from investing in large projects.
- Flipkart and Snapdeal will continue to struggle to raise money.
- SMBs in manufacturing will not be able to add additional capacities.
- It should be noted, however, that small funding rounds will not be affected.
"Ratings are a cue to global investors about the confidence to invest in the Indian economy," says Pawan Gupta, founder of Connect2India.
He says that in the long run, India was on a growth path because every state government is pushing Make in India.
The impact on Make in India
Data available with Connect2India points to the fact that India has been robust in manufacturing. Let us take the automobile sector, for example.
The exports of both the automotive sector and the automotive component sector (driven by SMBs) from India has been fast growing in the last five years. Connect2India says that exports of automotive grew from $ 9.3 billion in 2010 to $ 14.4 billion in 2015, and the exports of main automotive components (the parts and accessories - HS code 8708) grew from $ 2.1 billion in 2010 to $ 3.9 billion in 2015. "At the same time, the imports of automotive components in India has remained fairly constant over the last couple of years," says Pawan. He says that this is in spite of a continuous increase in the demand seen by the automotive sector in India for the last five years, with an annual production of 23.37 million vehicles in FY 2014-15.
"Automotive SMBs have scaled up well to reduce imports, and have boosted exports thanks to the clusters fostered by the industry," says Girish Wagh, Senior VP and head of product planning at Tata Motors.
So, while manufacturers are bullish, the economy still needs capital infusion and investors to come in. Banks need to shore up their balance sheets and have a capital adequacy ratio of 10 percent of infused capital to protect themselves from expected losses. All these are in line with the Basel III banking norms that will go live in 2018. The government has proposed to infuse more than Rs2 lakh crore into the banking ecosystem by that time.
Will the ratings scenario improve?
The stock markets are bullish on the economy. It is also interesting to note that the 10-year government bond yields have fallen to Rs 6.86 from a high of Rs 7.7 a year ago. The fall in yields reflects the fact that inflation will not reduce and that the government could struggle to pay off long term debt.
That said, India has set itself targets to reduce inflation, and has succeeded in bringing it down to 5.05 percent from an high of more than 11 percent a couple of years ago. It also plans to bring down the fiscal deficit to 3.5 percent of GDP from the current 3.9 percent.
"Make in India is a long term goal, and it is an important part of the nation building process that will be implemented to make the economy stronger. But political will is necessary for the long run," says Mohandas Pai, founder of Aarin Capital.
At least Indian prospects look bright. The ratings are a merely a reference, and do not become the foundation for business decision making. Make in India will continue to push Indians to innovate and the globe to invest.