Narendra Modi, India’s prime minister, arrives at the Bhartiya Janata Party (BJP) headquarters in New Delhi, India, on Sunday, Dec. 3, 2023. India’s ruling Bharatiya Janata Party won three crucial state elections and unseated the opposition in two of them, strengthening Modi’s bid for a third term in office.
Prakash Singh | Bloomberg | Getty Images
S&P Global Ratings raised India’s sovereign rating outlook to ‘positive’ from ‘stable’ while retaining the rating at ‘BBB-‘, saying on Wednesday the country’s robust economic expansion was having a constructive impact on its credit metrics.
“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” S&P said, adding that regardless of the election outcome, it expected broad continuity in economic reforms and fiscal policies.
India’s marathon national election lasting six weeks, the world’s largest, is in its final stage with votes scheduled to be counted on June 4, and investors are gearing up for Prime Minister Narendra Modi securing a third term in office.
Finance Minister Nirmala Sitharaman called the upgrade a “welcome development”.
“This reflects India’s solid growth performance and a promising economic outlook for the coming years,” said in a social media post.
The rating agency’s positive outlook on India is predicated on its robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation, it said.
“We believe these factors are coalescing to benefit credit metrics,” S&P analysts wrote in a note.
The Indian rupee was off its day’s lows while the benchmark 10-year bond yield eased three basis points to 6.99% after the outlook upgrade.
India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile, S&P said.
Elevated fiscal deficits, a large debt stock and interest burden persist, but the government is prioritising ongoing consolidation efforts, it added.
“With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation,” the S&P analysts said.
“Our projections indicate general government deficit of 7.9% of GDP in fiscal 2025 to slowly decline to 6.8% by fiscal 2028.”
S&P expects India’s economy to expand at close to 7% annually over the next three years which it said should have a moderating effect on the ratio of government debt to GDP despite high fiscal deficits.
Its favourable GDP growth to interest rate differential is keeping government borrowing sustainable, S&P said, adding that it expects the country’s debt to GDP ratio to reduce to 81% by fiscal 2028 from 85% currently.
Sustained deceleration in price growth has allowed the central bank to conclude its monetary tightening campaign and S&P expects a moderately easier monetary policy stance before the end of fiscal 2025, it said.
The agency may raise its ratings on India if fiscal deficits narrow meaningfully to bring down the general government debt to below 7% of GDP on a structural basis or if it observes a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility with inflation staying low on a durable basis, it said.
Alternately, the agency could revise the outlook to stable if it observes an erosion of political commitment to maintain sustainable public finances or if the current account deficits widen materially to weaken India’s external position.
“We will continue to fruitfully engage with them in making a case about strength of the economy and potential rating upgrade,” Economic Affairs Secretary Ajay Seth told Reuters.
