S&P said the rating was driven by factors, such as the country’s dynamic and fast-growing economy, strong external balance sheet, and stable institutions that support policy predictability.
But these strengths are counterbalanced by the “government’s weak fiscal performance and burdensome debt stock, as well as low gross domestic product (GDP) per capita”, it added. High energy prices in the wake of the West Asia war, and challenging agricultural conditions due to below-normal monsoon rains, will marginally slow India’s growth this year, the agency reckoned.
“But we expect economic fundamentals to remain sound and support robust growth over the next two to three years,” S&P said in a statement.
Last year, S&P, the biggest of the global ratings firms, had raised its rating on India to ‘BBB’ from ‘BBB-‘ after 18 years, citing the country’s economic resilience and sustained fiscal consolidation. However, Fitch has retained its sovereign rating on India at BBB- since 2006, while Moody’s has retained the same lowest investment grade of ‘Baa3’ since 2020. As for short-term India credit rating, S&P has maintained it at A-2, indicating that the country’s capacity to meet financial commitments remains satisfactory.
Growth and rating outlook
The agency reckoned that India’s growth will ease to 6.6% in the current fiscal from the average of 7.9% in the previous five years due to ongoing energy shocks and challenging agricultural conditions. But S&P expects India’s medium-term growth to remain strong, likely averaging 7% over the next three years, substantially above that of sovereign peers at similar income levels. Public investment and consumer momentum will support “solid growth prospects” in the next two to three years. “We expect policy continuity, which would support further economic reforms and fiscal consolidation,” it said.Also Read: Broad-base rise in food prices despite monsoon recovery, RBI’s state of economy report shows
However, any erosion of political commitment to consolidate public finances and a material slowdown in India’s economic growth on a structural basis could lead to negative rating action.
Conversely, it could raise the ratings “if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6% of GDP on a structural basis”.
Fiscal parameters
India’s fiscal settings have been the weakest part of its sovereign ratings profile, S&P said.
India’s fiscal deficit could beat its current budget target of 4.3% of GDP for FY27, the agency added. But it also acknowledged India’s commitment to fiscal consolidation as the country maintained its strong infrastructure drive.
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S&P projected the combined FY27 fiscal deficit of the central and state governments to touch 7.3% of GDP in FY27, which will ease to 6.6% by FY30.
Strong external position
India’s strong external position is a key factor in its credit profile, S&P said. The country’s current account deficits may remain small over the next few years while domestic demand stabilises, and the weaker rupee boosts competitiveness, it said.
India’s limited external debt also moderates currency and capital flight risk, it said.