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S&P GLOBAL Ratings on Wednesday revised up the outlook for India to ‘positive’ from ‘stable’, retained ‘BBB-’ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings, and said continued policy stability, deepening economic reforms and high infrastructure investment will sustain long-term growth prospects for India.
S&P had last revised up the outlook to stable from negative in September 2014, and had raised the rating to BBB- from BB+ in January 2007.
Union Finance Minister Nirmala Sitharaman said the revision reflects “India’s solid growth performance and a promising economic outlook for the coming years”.
“It has been possible due to the series of macroeconomic reforms undertaken since 2014, along with substantial outlay for capex, fiscal discipline, and decisive & visionary leadership. As envisioned by Hon’ble PM Shri @narendramodi, India is well on track to become the third-largest economy in the third term of the government and become a #ViksitBharat by 2047,” she said in a post on X.
While results of the Lok Sabha elections are due in less than a week, S&P expects broad continuity in economic reforms and fiscal policies regardless of the outcome. “India’s robust economic expansion is having a constructive impact on its credit metrics. We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” it said.
S&P said it may raise the ratings if India’s fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7 per cent of GDP on a structural basis. India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, S&P said. The ratings could also improve if there is a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time, it said.
If growth remains robust, monetary policy ensures low inflation and the government commits itself to fiscal consolidation i.e., lowers its deficit as a percentage of GDP continuously, it is likely the S&P would revise up India’s rating too.
With economic recovery now well on track, the government is again able to depict a more concrete, albeit gradual, path to fiscal consolidation, it said. “The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, could alleviate India’s weak public finances,” it said.
‘BBB-’ is considered to be the lowest investment grade rating. As per S&P Global’s definition of its ratings, an obligor rated ‘BBB’ has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments.
S&P projects the general government deficit, which includes fiscal deficits of states and Centre, to slowly decline to 6.8 per cent by financial year 2027-28 from 7.9 per cent of the GDP in 2024-25. Further, the ratio of general government debt to GDP is projected to decline to 81 per cent by 2027-28 from 85 per cent in 2023-24. Pre-pandemic, it was 75 per cent of GDP, but had shot up to over 90 per cent during the pandemic peak.
An increasing share of the government spending is going to infrastructure and this will ease bottlenecks to put the country on a higher growth trajectory, it said. It cautioned about persistent elevated fiscal deficits, a large debt stock and interest burden, but noted that the government is prioritising ongoing consolidation efforts
S&P said the Indian economy has staged a remarkable comeback from the Covid-19 pandemic, with real GDP growth estimated to have averaged 8.1 per cent annually in the past three years, the highest in the Asia-Pacific region. In the medium term, the growth dynamics are expected to continue to play out, with GDP expanding close to 7.0 per cent annually over the next three years. This is likely to have a moderating effect on the government debt-to-GDP ratio despite still-wide fiscal deficits, it said.
“Modi administration has increasingly shifted budget allocation to infrastructure spending. Capital expenditure is scheduled to increase to Rs 11 trillion, or about 3.4 per cent of GDP in the financial year 2024- 2025. This is almost 4.5x from a decade before. We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth,” it said.
Continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. In addition, “cautious fiscal and monetary policy that diminishes the government’s elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months”, it said.
S&P, however, cautioned that there could be a downside revision in India’s outlook to stable if there is an erosion of political commitment to maintain sustainable public finances, which signifies a weakening of the country’s institutional capacity. “If current account deficits widen materially to weaken India’s external position such that the country becomes a narrow net external debtor, we could also revise the outlook to stable,” it said.
