S&P Global Reaffirms India’s Sovereign Credit Rating At ‘BBB;' Outlook Stable

S&P Global Ratings affirmed India's long-term sovereign credit ratings at 'BBB-' with a 'stable' outlook.

The government will likely maintain elevated fiscal deficits and a large debt stock despite ongoing consolidation efforts, it said.

"We affirmed our 'BBB-' long-term and 'A-3' short-term foreign and local currency sovereign credit ratings on India," S&P Global said in a press release on Thursday. "The stable outlook on the long-term rating reflects our view that India's strong economy and healthy revenue growth will support its weak fiscal settings."

The 'stable' rating outlook reflects the expectation that India's sound economic fundamentals will be sufficient to offset the government's weak fiscal performance, helping to sustain elevated government funding needs and a high interest burden over the next 24 months, it said.

The ratings could be lowered if India's economic growth slows materially on a sustained basis, such that this negatively affects its fiscal sustainability, or if changes in net general government debt, general government debt to GDP, or the government's interest burden materially exceed our forecasts, signifying a weakening of the country's institutional capacity to maintain sustainable public finances, S&P Global said.

The ratings could be raised if India's fiscal metrics dramatically improve on a sustained basis or in the case of a sustained and substantial improvement in the central bank's monetary policy effectiveness and credibility, such that inflation is managed at a durablely lower rate over time, it said.

The sovereign credit ratings of India are anchored by the country's dynamic, fast-growing economy, strong external balance sheet, and democratic institutions supporting policy predictability and compromise. These strengths are counterbalanced by the government's weak fiscal performance and burdensome debt stock, as well as the economy's low GDP per capita.

The economy has emerged from the pandemic-driven downturn into a rapid recovery phase. Two straight years of above-trend real GDP growth illustrate this, the global rating agency said. The pace of economic expansion is normalising towards a more sustainable level.

S&P Global Ratings forecasts that the economy will continue to grow at a strong rate, with real GDP growth of 6% in FY24 and 6.9% in FY25 and FY26, driven by strong consumer and investment dynamics.

The coalition government led by the Bharatiya Janata Party retains a healthy majority in the Lok Sabha, India's lower house of parliament. This supports the government's efforts to implement economic reforms. That said, major new reforms are unlikely over the next 12 months until the 2024 parliamentary elections are over, the rating agency said.

India differs from most regional and global peers in that its state and local governments also run persistently high deficits, according to the ratings agency. "We anticipate that aggregate state shortfalls will decline to below 3% of GDP by FY25. Nevertheless, in combination with central government deficits that will track above 4.5% of GDP, we forecast India will maintain high general government fiscal shortfalls averaging 8% of GDP through FY27," it stated.

The ratings agency forecasts that overall net general government debt will stabilise just below 85% of GDP over the next three years. This is higher than India's pre-pandemic net debt stock of 75% of GDP, but well below the pandemic peak of greater than 90%.