S&P revises India's outlook from 'stable' to 'positive', maintains rating at 'BBB-'

The shift to a positive outlook indicates expectations of ongoing policy stability, significant economic reforms, and substantial infrastructure investments, which are expected to bolster long-term growth prospects.

S&P underscored that, together with prudent fiscal and monetary policies, these factors could reduce the government's high debt and interest burden, enhance economic resilience, and potentially result in a higher rating within the next 24 months.

In May of last year, S&P Global Ratings maintained India’s sovereign rating at ‘BBB-’ for the long term and ‘A-3’ for the short term, with a stable outlook. The agency emphasized robust economic fundamentals anticipated to support growth over the next two to three years, despite concerns about weak fiscal performance and low GDP per capita.

Today's announcement from S&P is consistent with ratings from other global agencies, including Fitch and Moody's, which have also assigned India the lowest investment grade rating with a stable outlook.

“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” the ratings firm said in a statement.

"We may raise the ratings if India's fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7 percent of GDP on a structural basis," the agency said.

The statement indicates that a meaningful and sustained reduction in fiscal deficits, which leads to a stable and lasting decrease in debt levels as a percentage of GDP, could prompt S&P to upgrade India's credit rating.

It added that sustained public investment in infrastructure, combined with fiscal adjustments, could improve India's weak public finances. Additionally, a notable improvement in the central bank's monetary policy effectiveness and credibility, resulting in lower inflation rates, could also prompt a ratings upgrade.

Additionally, the agency expressed expectations of continued economic reforms and fiscal policies, regardless of the outcome of upcoming elections.

S&P also warned that India's outlook may be revised to 'stable' if there was a decline in political commitment to maintaining sustainable public finances, indicating 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," it said.

"The Indian economy has staged a remarkable comeback from the Covid-19 pandemic. We estimate real GDP growth in the past three years to have averaged 8.1 per cent 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 per cent annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits," S&P said.

The positive outlook is attributed to India's strong economic growth, enhanced quality of government spending, and a political commitment to fiscal consolidation.

Regardless of the outcome of the 2024 general election, S&P anticipates continuity in economic reforms and fiscal policies, which will support growth and fiscal consolidation efforts.