S&P Global Ratings revised its outlook on India to positive from stable. At the same time, it has affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings.
The transfer and convertibility assessment remains ‘BBB+’.
“The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with 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,” the rating agency said.
Upside scenario
S&P Global 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% of GDP on a structural basis. 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.
“We may also raise the ratings if we observe 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.
Downside scenario
S&P Global said it could revise the outlook to stable if we observe an erosion of political commitment to maintain sustainable public finances, which in turn 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.
Rationale
“Its positive outlook on India is predicated on its robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation. We believe these factors are coalescing to benefit credit metrics,” it said.
The Indian economy has staged a remarkable comeback from the COVID-19 pandemic. We estimate real GDP growth in the past three years to have averaged 8.1% annually, the highest in the Asia-Pacific region. “We expect these growth dynamics to continue to play out in the medium term, with GDP expanding close to 7.0% annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits,” the rating agency said.
The quality of government spending has improved in the past four to five years. The Modi administration has increasingly shifted budget allocation to infrastructure spending. Capital expenditure is scheduled to increase to Rs 11 trillion, or about 3.4% of GDP in fiscal 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.
India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile. With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation. Our projections indicate general government deficit of 7.9% of GDP in fiscal 2025 to slowly decline to 6.8% by fiscal 2028, it said.
“Irrespective of the June 2024 general election results, we expect the incoming government to carry on economic reforms to support the growth vigour, continued infrastructure investment drive, and commitment to fiscal consolidation,” S&P Global said.
The sovereign ratings on India are anchored by a dynamic and fast-growing economy, strong external balance sheet, and democratic institutions that support policy predictability. Counterbalancing these strengths are the government’s weak fiscal performance and burdensome debt stock, as well as low GDP per capita, it said.
