S&P upgrades sovereign outlook on India to ‘positive’

Global ratings agency S&P Global Ratings has revised its outlook on India to “positive” from “stable” and affirmed its 'BBB-/A-3' sovereign credit ratings. It says India's “robust economic expansion” is having a constructive impact on its credit metrics and expects sound economic fundamentals to underpin the growth momentum over the next two to three years.

S&P says India’s sovereign ratings are anchored by a dynamic and fast-growing economy, strong external balance sheet, and democratic institutions. It highlights fiscal performance, lower GDP per capita and debt as negatives for the country. “Counterbalancing these strengths are the government's weak fiscal performance and burdensome debt stock, as well as low GDP per capita.”

On the elevated levels of fiscal deficits, S&P thinks a large debt stock and interest burden persist for India, but the government is prioritising ongoing consolidation efforts.

The New York-based global agency says its “positive outlook” on India reflects “continued policy stability, deepening economic reforms, and high infrastructure investment”, which will sustain long-term growth prospects. 

On the upside scenario, S&P says it may raise the ratings if India's fiscal deficits narrow meaningfully. Another scenario to raise the ratings would be improvement in the central bank's “monetary policy effectiveness and credibility”. The management of inflation at a durably lower rate over time is crucial for this upgrade.

In the event of a downside scenario, S&P says it could revise the “outlook” on India to “stable” if there is an erosion of political commitment to maintain sustainable public finances. It signifies a weakening of the country's institutional capacity.

Explaining the rationale behind the upgrade, S&P says its positive outlook on India is predicated on the country’s “robust economic growth”, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation. 

The Indian economy has staged a remarkable comeback from the COVID-19 pandemic, says S&P. “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.” 

In terms of spending in the past four to five years, S&P says the Modi administration has increasingly shifted budget allocation to infrastructure spending. “Capital expenditure is scheduled to increase to Indian rupees (INR) 11 trillion, or about 3.4% of GDP in fiscal 2025 (April 1, 2024, to March 31, 2025). This is almost 4.5x from a decade before.” 

The improvements in infrastructure and connectivity in India are expected to remove chokepoints, which are hindering long-term economic growth.

The ratings agency says reforms will continue regardless of the outcome in the 2024 elections. “Irrespective of the June 2024 general election results, we expect the incoming government to carry on economic reforms to support the growth vigor, continued infrastructure investment drive, and commitment to fiscal consolidation.”

It forecasts India's real GDP growth at 6.8% this year, which compares favourably with emerging market peers amid a broad global slowdown. The public investment and consumer momentum will underpin solid growth prospects over the next three to four years, it adds.