Opinion By raising India’s credit rating, S&P affirms optimism about growth

Last week, S&P Global Ratings raised India’s long-term sovereign credit rating from BBB- to BBB. A BBB rating, which is at the lower end of the investment grade rung, indicates adequate capacity to repay obligations. S&P’s rationale for the upgrade rests on the pillars of “buoyant” growth, the “commitment” to fiscal consolidation, improved “quality” of spending and anchored inflationary expectations. Coming at a time of acute economic uncertainty, the ratings action — this is the first upgrade by the agency in 18 years — reaffirms India’s growth prospects, underlines its resilience and its “remarkable” recovery from the pandemic.

S&P has projected the Indian economy to grow from around $3.9 trillion in 2024 to about $5.5 trillion by 2028, with growth averaging roughly 6.8 per cent over the next few years. This is marginally higher than other assessments, such as by the IMF. In its April World Economic Outlook, the Fund had pegged the economy to grow at around 6.3 per cent over this period. The ratings agency is strikingly less pessimistic about the impact of Trump’s tariffs on the Indian economy, expecting it to be “manageable” and not pose a “material drag on growth”. This is based on its view that India is “relatively less reliant on trade” (exports to US are roughly 2 per cent of GDP), and more on domestic consumption. There is, however, a cautionary note here. This assessment is at odds with views expressed by several analysts who believe that not only will there be a direct impact of high tariffs but that there will also be an indirect impact which could reflect in the form of lower investment flows into the country.

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The government’s debt-deficit dynamics is another area of improvement flagged by the ratings agency. General government debt (Centre and states put together) had surged during the pandemic. However, since then, governments have stayed on the path of consolidation, bringing down their deficits and debts. The ratings agency expects the general government deficit to fall from 7.3 per cent of GDP in 2025-26 to 6.6 per cent by 2028-29. Alongside, it projects the debt to GDP ratio to decline from 83 per cent in fiscal 2025 to 78 per cent by fiscal 2029, bringing it “closer to its pre-pandemic level.” While progress has been faster than what was envisaged by the Finance Commission, the path of consolidation must continue to be adhered to. S&P has, in fact, cautioned about not doing so, saying that “We may lower the ratings if we observe an erosion of political commitment to consolidate public finances.”