S&P affirms 'BBB-' sovereign credit rating on India; outlook ‘stable’

Global ratings agency S&P Global Ratings has affirmed 'BBB-/A-3' short-term unsolicited foreign and local currency sovereign credit rating on India, saying India's economy is performing well despite global challenges. It says India's economy is set for real GDP growth of about 6% this year, which compares favourably with emerging market peers amid a broad global slowdown.

S&P says the country's economic outlook on the long-term rating is "stable". "The stable rating outlook reflects our expectation that India's sound economic fundamentals will be sufficient to offset the government's weak fiscal performance, helping to sustain elevated government funding needs and a high-interest burden over the next 24 months," says the New York-based global ratings agency in its latest report.

Elaborating on the downside scenario, S&P said it may lower the ratings for India if its economic growth slows materially, on a sustained basis, to an extent that it negatively affects its fiscal sustainability. This kind of ratings action could also come if changes in net general government debt, general government debt to GDP, or the government's interest burden materially exceed S&P's forecasts, it says, adding it'll signify a weakening of institutional capacity to maintain sustainable public finances.

On the other hand, India's ratings could be raised if its fiscal metrics "dramatically improve" or if a "sustained and substantial improvement" is observed in the RBI's monetary policy effectiveness and credibility, and inflation is managed at a durably lower rate over time.

In its rationale behind the India ratings, S&P said India remains a “dynamic, fast-growing economy”, with a strong external balance sheet, and democratic institutions supporting policy predictability and compromise. However, these strengths are counterbalanced by the government's “weak fiscal performance and burdensome debt stock, as well as the economy's low GDP per capita”, it adds.

According to S&P, India's economy has emerged from the pandemic-driven downturn into a rapid recovery phase. Nevertheless, the economy has maintained good momentum, it says, adding that solid consumer and investment dynamics are expected to propel real GDP growth to 6% in fiscal 2024 and 6.9% in fiscal years 2025 and 2026.

On the higher capital outlay, S&P says surging capital expenditure (CAPEX) by the Centre, to some extent, by states will help to revive investment and spur construction activity. "Based on budget plans for fiscal 2024 and our expectation of strong revenue growth, we believe this support will continue during the current fiscal year."

It says initiatives like the introduction of a goods and services tax in 2017 and gradual progress in resolving legacy bad debts underpin solid growth prospects and stronger balance sheets.

It says the central government is increasingly tilting toward spending on capex in its budgets in the past three years. Following surges of 27.8% and 26.1% in total effective capex in fiscal years 2022 and 2023, respectively, it is budgeting for another 30.1% rise in allocations for fiscal 2024. "More effective capex programs should help to alleviate India's widespread shortfall in physical infrastructure capacity."