Rating upgrade: India’s election-proof economy gets S&P’s thumbs up

India's credit rating upgrade
India's credit rating upgrade by S&P Global reflects global optimism on the country's long-term growth prospects.

India rating upgrade: S&P Global Ratings raised its outlook for India from stable to positive less than a week ahead of the Lok Sabha election results, citing continued policy stability, deepening economic reforms, and high infrastructure investment sustaining long-term growth prospects. The rating agency has retained BBB- long-term and A-3 short-term unsolicited foreign and local currency sovereign credit ratings. S&P last revised India’s outlook in September 2014, upgrading it from negative to stable. There is further room for improvement if the country’s fiscal deficit narrows and the net change in general government debt falls below 7% of the GDP on a structural basis.

S&P Global said the outcome of the upcoming Lok Sabha election does not impact their revision. The revision is largely due to India’s commitment to broader economic reforms and fiscal policies, regardless of the election results. The continued economic expansion bodes well for credit metrics. Over the next two to three years, sound economic fundamentals will underpin the growth momentum, says the ratings agency.

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Reasons behind India’s rating upgrade

India has historically been vulnerable to a low sovereign ratings profile due to its weak fiscal settings, S&P said. However, sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility, resulting in achieving the inflation target and maintaining a lower rate over time, may lead to further upgrades.

S&P, however, cautioned that there could be a downside risk, leading to a stable outlook revision, if the government reneges on its spending promises, signalling a weakening of institutional capacity. A significant widening of the current account deficit and the country becoming a narrow net external debtor could also lead to a downgrade.

S&P is hopeful that the general government deficit, including both state and central fiscal deficits, will slowly decline to 6.8% by the financial year 2027-28. Currently, it stands at 7.9% of GDP in 2024-25. The ratio of general government debt to GDP is projected to decline to 81% by 2027-28 from the present 85%. Pre-pandemic, it was 75% of GDP but had shot up to over 90% during the pandemic peak.

As the economy rebounds, the government can now lay out a clearer, yet measured plan for bringing its finances under control. Increased government spending on infrastructure will boost long-term economic growth, and coupled with fiscal discipline, can help improve India’s strained public finances.

Structural reforms are crucial to maintaining India’s upward trajectory. The government’s focus on improving the business environment through initiatives like the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) has strengthened the economic framework. Moreover, the introduction of Production Linked Incentive (PLI) schemes across various sectors aims to boost manufacturing and exports, further supporting economic growth. These reforms, coupled with fiscal prudence, have created a stable environment for sustainable development.

India’s push towards a digital economy has also played a significant role in enhancing its growth prospects. Initiatives like Digital India and the proliferation of internet connectivity have led to increased digital transactions and financial inclusion. The rapid adoption of technology in various sectors, including agriculture, healthcare, and education, is transforming traditional practices and increasing efficiency. The government’s emphasis on building a robust digital infrastructure is expected to yield long-term benefits.

Outlook for Indian economy

The big three credit rating agencies, including Standard and Poor’s (S&P) and Fitch Ratings, have all given positive signals for the Indian economy. Fitch recently noted that the larger-than-expected Reserve Bank of India (RBI) dividend of Rs 2.1 lakh crore to the government is positive for India’s sovereign rating fundamentals. It should help ensure the 5.1% of GDP deficit target for the fiscal year ending March 2025 is met and could be used to lower the deficit beyond the current target.

S&P Global Ratings’ recent upgrade of India’s outlook might signal that rating agencies are becoming more optimistic. According to Nomura, other rating agencies are likely waiting to see the results of India’s elections and the new government’s plans before making any changes to their ratings. Currently, Fitch has India at BBB- with a stable outlook, with its last rating action commentary in January—just before the interim Budget announcement. After the recent budget announcement, Moody’s indicated that India’s debt and budget deficit are still higher than before the pandemic, posing a major hurdle for a credit rating upgrade from Moody’s.

India’s external sector performance has been robust, with exports showing resilience despite global uncertainties. The government’s efforts to diversify export markets and reduce dependency on specific regions have started to bear fruit. Additionally, the rise in foreign direct investment (FDI) inflows reflects global confidence in India’s growth story. These positive trends in the external sector are expected to support the overall economic growth and strengthen the balance of payments position.

Recently, Deloitte also revised its outlook for India upward for FY24, expecting growth of 7.6-7.8% from its earlier forecast of 6.9-7.2%, anticipating higher consumption expenditure and economic activity. It also affirmed that GDP will grow 6.6% in FY25 and 6.75% in FY26. This revision follows several other entities, including the IMF, World Bank, and Asian Development Bank, which also raised their forecasts for India’s GDP growth in FY24.

India remains the world’s fastest-growing major economy, rebounding strongly from the pandemic. Over the past three years, its GDP growth has been the fastest in Asia-Pacific, averaging 8.1% annually. This momentum is expected to continue, with growth staying near 7% for the next three years. EY India Chief Policy Advisor DK Srivastava recently noted that both domestic and international institutions are forecasting robust growth of around 7% for India in the fiscal year 2025.

However, most analytic firms agree that there are several downside risks to the Indian economy. Despite reporting higher-than-expected growth, the economy faces challenges around inflation and geopolitical uncertainties, which have impacted food and fuel prices.

Investments in social development and human capital are also pivotal to sustaining India’s growth. Programs aimed at improving healthcare, education, and skill development are essential for building a productive workforce. The government’s focus on inclusive growth ensures that economic benefits are distributed across various segments of society, thereby reducing inequality and fostering social stability. These efforts are crucial for maintaining long-term growth momentum and enhancing the quality of life for citizens.