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S&P ups India's outlook to positive, raises hope for rating upgrade in 2 years

S&P ups India's outlook to positive, raises hope for rating upgrade in 2 years
Giving thumbs up to the economic management of the Modi government, S&P Global Ratings after a gap of 14 years upgraded India's sovereign rating outlook to positive from stable on robust growth, improved quality of public spending in last 5 years and expectation of broad continuity in reforms and fiscal policies. S&P, however, retained India's sovereign rating at the lowest investment grade of 'BBB-'.

In a statement on Wednesday, the US-based agency said India's rating can be upgraded in the next 24 months if the country adopts a cautious fiscal and monetary policy that reduces the government's elevated debt and interest burden while bolstering economic resilience.

S&P's rating commentary comes within a week of RBI's record Rs 2.10 lakh crore dividend transfer to the government. The funds may be used to cut the Centre's fiscal deficit.

"India outlook revised to positive on robust growth and rising quality of Government spend; BBB- long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings affirmed," S&P said.

Sovereign rating is a tool to measure the risk level of a country's investing environment and shows investors the ability of a country to repay its debts. In 2010, S&P had upped the outlook to stable from negative.

The ratings are looked at by investors as a barometer of the country's creditworthiness and has impact on borrowing costs.

"Our 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. We believe these factors are coalescing to benefit credit metrics," S&P said.

It said the composition of government spending has been transformed, with an increasing share going to infrastructure. This will ease bottlenecks to put the country on a higher growth trajectory.

S&P said India's robust economic expansion is 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. Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies," S&P said.

The positive outlook reflects S&P's view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects.

"That, along with cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months," S&P said.

The Indian economy has staged a "remarkable comeback" from the COVID-19 pandemic, S&P said, adding it forecasts India's real GDP growth at 6.8 per cent this year, which compares favourably with emerging market peers amid a broad global slowdown.

The agency estimates real GDP growth in the past three years to have averaged 8.1 per cent annually, the highest in the Asia-Pacific region.

It expects 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 which will have a moderating effect on the ratio of government debt to GDP despite still wide fiscal deficits.

S&P said the quality of government spending has improved in the past four to five years and public investment and consumer momentum will underpin solid growth prospects over the next three to four years.

The Modi administration has increasingly shifted budget allocation to infrastructure spending. Capital expenditure is scheduled to increase to Rs 11 lakh crore, or about 3.4 per cent of GDP in fiscal 2025. This is almost 4.5x from a decade before.

S&P believes that the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth.

India's weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile. All three major global rating agencies -- S&P, Fitch and Moody's -- have accorded the lowest investment grade rating to India.

S&P said with economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation.

S&P projects general government (Centre + states) deficit of 7.9 per cent of GDP in fiscal 2025, which will slowly decline to 6.8 per cent by fiscal 2028.

"Irrespective of the June 2024 general election results, we expect the incoming government to carry on economic reforms to support the growth vigor, continued infrastructure investment drive, and commitment to fiscal consolidation," S&P said.

S&P said it may raise the ratings if India's fiscal deficit narrows meaningfully such that the general government debt falls below 7 per cent of GDP on a structural basis.

"We may also raise the ratings if we observe a sustained and substantial improvement in the central bank's monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time," it said.

S&P projects the ratio of general government debt to GDP to decline to 81 per cent by fiscal 2028, from 85 per cent in fiscal 2024. This is higher than the pre-pandemic debt burden of 75 per cent of GDP, but well below the pandemic peak of greater than 90 per cent.


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