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S&P Global upgrades India’s outlook to ‘positive’, affirms ‘BBB-’ long-term rating

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NEW YORK : Taking note of robust growth and rising quality of government spending, S&P Global Ratings on Wednesday revised the outlook on India’s economy to ‘positive’ from ‘stable’. However, it retained the sovereign rating as ‘BBB Minus’.

The rating has been on BBB- since January 30, 2007 (when it was upgraded from BB+). It has been on BBB-/stable since September 26, 2014 (it was placed on negative outlook on April 25, 2012).  Meanwhile, it is the first agency which has revised the outlook. Earlier in January, relying on a robust medium-term GDP growth outlook and sound external finances, Fitch affirmed India’s sovereign rating at ‘BBB Minus’ with stable outlook. ‘BBB Minus’ is the lowest investment grade rating offered.

Rating upgrade

Change in outlook means there is a possibility of rating upgrade in the next two years. “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,” S&P Global Ratings said in a statement.

Talking about possibility of upgrade, the agency said that it might raise ratings if India‘s fiscal deficit narrows meaningfully to the extent that the net change in general government debt falls below 7 per cent 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.

However, the agency could revise the outlook to stable if it observes 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,” the agency said.

Sound fundamentals

Talking about overall situation, the agency said that India‘s robust economic expansion is having a constructive impact on its credit metrics. It expects sound economic fundamentals to underpin the growth momentum over the next two to three years. “Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies,” the agency said.

Commenting on the upgrade, Achala Jethmalani, Economist with RBL Bank, said while S&P Global mentioned that India‘s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, this weakest link is now becoming the strongest, at least in parlance of moving positively towards getting India its long due sovereign rating upgrade.

“The fiscal rectitude and commitment to fiscal consolidation with improved mix of revenue-capital expenditure and growth outlook augurs well from growth, deficits and deficit funding aspects. The positive outlook and ratings had to follow. Given that India is walking the fiscal glide path, the growth-inflation outlook is favourable, the external sector remains well-placed, we are optimistic on seeing a rating upgrade in the next 18-24 months,” she said.


Rationale behind outlook upgrade

• Robust economic growth, pronounced improvement in the quality of government spending, political commitment to fiscal consolidation

• Expect growth dynamics to continue to play out in the medium term, with GDP expanding close to 7% annually over the next three years.

• Improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth.

• Government again able to depict a more concrete (albeit gradual) path to fiscal consolidation. Expects general government deficit to dip to 6.8% by fiscal 28 from 7.9% in fiscal 2025

• Irrespective of the June 2024 general election results, the incoming government is expected to carry on economic reforms to support the growth vigor, continued infrastructure investment drive, and commitment to fiscal consolidation.

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