India’s BBB sovereign rating: S&P Global has kept India’s sovereign rating at BBB with a stable outlook. A year ago, the agency upgraded India from BBB-, its first upgrade of the country in 18 years. The latest review suggests that another step up will be harder. India’s growth record is no longer the main question. The state of its public finances is.
Credit ratings deserve some scepticism. They do not determine a country’s economic prospects, and changes in sovereign ratings do not automatically translate into lower borrowing costs. India also raises most of its public debt at home and in rupees. Even so, the reasoning behind the rating is worth examining because it points to a weakness that strong GDP numbers can sometimes obscure.
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S&P lists India’s economic growth, external position and institutional stability among its credit strengths. The weaknesses are familiar: large fiscal deficits, a high public debt burden and low per-capita income. These have kept India close to the lower end of the investment-grade scale despite an economic performance that compares well with most large economies.
The first upgrade was the easier one
The 2025 upgrade recognised changes that had been under way for some time. Growth had remained strong after the pandemic. The Centre had reduced its fiscal deficit. Public investment had risen. Monetary policy had gained credibility and the external balance sheet had become more resilient.
These improvements were enough to move India from BBB- to BBB. Moving higher will require a different order of fiscal progress.
S&P has indicated that it wants to see a sustained reduction in government borrowing, with the annual increase in net general government debt falling below 6% of GDP on a structural basis. The emphasis on structural improvement matters. A good year for tax collections or nominal GDP growth will not be sufficient. The change has to hold across the economic cycle.
It also has to include the states.
The Union government has budgeted a fiscal deficit of 4.3% of GDP in 2026-27, against 4.4% last year. Central government debt is also expected to decline as a share of GDP. These are respectable numbers when set against the fiscal damage caused by the pandemic.
They still leave little room for error.
Fuel-tax relief reduces revenue. Fertiliser subsidies can rise when global prices move against India. Welfare commitments are politically difficult to reverse. Capital expenditure has become an important prop for investment. Each claim on the Budget can be defended on its own. Taken together, they make deficit reduction more difficult.
S&P expects the combined deficit of the Centre and states to be about 7.3% of GDP this year and to fall to 6.6% by 2029-30. That is progress, though not enough to make India’s fiscal position look comfortable. State finances are especially important because the next phase of consolidation cannot be delivered by North Block alone.
Growth can carry only part of the burden
India’s advantage is that the economy continues to grow rapidly. Real GDP expanded 7.7% in 2025-26. The first-quarter numbers for the current year were stronger still, with GDP growing 7.8%.
S&P expects full-year growth to moderate to 6.6%. That would still be a strong performance for a large economy. The agency also expects growth to average about 7% in the following years.
This helps explain why India can reduce its debt ratio even while continuing to run sizeable deficits. If nominal GDP grows faster than public debt, the stock of debt becomes smaller relative to the economy.
The mechanism is straightforward. It is also easy to misuse.
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Growth cannot permanently compensate for large additions to public debt. Interest payments absorb government revenue before money can be spent on infrastructure, health, education or other priorities. A high debt stock also narrows the room available to respond to the next economic shock.
India therefore faces a different fiscal problem from the one it confronted immediately after the pandemic. The task then was to bring an exceptional deficit down without derailing the recovery. The task now is to continue consolidation when many of the easier gains have already been taken.
This is also why expenditure quality becomes important. A rating upgrade would have little economic value if it were purchased through cuts in productive capital spending. The same holds for reductions in essential social expenditure that weaken human capital and future growth.
The relevant question is how much of government spending produces durable economic returns and how much reflects recurring commitments that become difficult to finance.
India’s BBB sovereign rating: Public debt remains the weak point
S&P expects net general government debt to decline from 85.4% of GDP in 2024-25 to 79.3% by 2029-30. That would undo a significant part of the increase caused by the pandemic, when the ratio rose above 90%.
A fall of six percentage points would be substantial. India would still carry a high debt burden relative to many sovereigns with comparable ratings.
Fitch reached much the same judgment earlier this month. It retained India at BBB- with a stable outlook. Its assessment gave considerable weight to India’s growth record, external finances and policy credibility, while continuing to cite high debt, deficits and debt-servicing costs as constraints on the rating.
The agreement between the two agencies is more useful than the letter grades themselves. India’s macroeconomic weakness is no longer an absence of growth. Nor is it an immediate balance-of-payments vulnerability of the sort the country has faced in earlier decades.
It is the amount that governments borrow and the revenue required to service the accumulated debt.
Inflation could make the calculation more difficult this year. S&P expects consumer inflation to rise after an unusually low average in 2025-26. Energy prices remain a risk and agricultural output still depends heavily on the monsoon. Higher inflation would constrain monetary policy and could also raise some items of government expenditure.
None of this amounts to an impending fiscal crisis. That is not what the BBB rating says. India has a large domestic savings base, substantial foreign-exchange reserves, limited foreign-currency sovereign debt and a record of macroeconomic stability that is much stronger than it was two decades ago.
The rating debate is about the distance between that record and the stronger public finances expected of countries further up the investment-grade scale.
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The next rating move will be harder
New Delhi has often argued that sovereign rating agencies understate India’s economic strength. There is some force in the criticism. Ratings inevitably involve judgment, and countries with very different growth prospects and debt structures can end up within the same rating category.
That argument cannot settle the fiscal question.
India wants to sustain high public investment, expand social protection, strengthen defence, finance the green transition and build the physical and human infrastructure needed for a much richer economy. These demands will grow before many of them begin to recede.
The answer cannot simply be lower spending. It will require stronger revenues, better expenditure choices and more credible state finances. Asset sales, subsidy reform and improvements in tax administration will matter, as will restraint in creating permanent expenditure commitments.
The 2025 upgrade rewarded changes already achieved. A second upgrade would require evidence that fiscal consolidation can survive political pressures, external shocks and the demands of a still-developing economy.
India has shown that it can grow at 7%. The harder test is whether governments can use those years of rapid growth to put the public balance sheet on firmer ground.