S&P Upgrades India’s Outlook to Positive After 10 Years

New Delhi: After a gap of 10 years, leading rating agency S&P Global Ratings on Wednesday said that it upgraded India’s sovereign rating outlook to positive from stable on robust growth, improved quality of public spending in the last 5 years and expectation of broad continuity in reforms and fiscal policies as well. At the same time, the rating giant also retained India’s sovereign rating at the lowest investment grade of 'BBB-'.

“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. However, the positive outlook reflects that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects,” the US-based agency said in a statement.

“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. 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,” it said.

The S&P’s rating commentary comes within a week of the Reserve Bank of India's record Rs 2.10 lakh crore dividend transfer to the central government. The funds may be used to cut the Centre’s fiscal deficit. The ratings are looked at by investors as a barometer of the country's creditworthiness, and have an impact on borrowing costs as well. “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.

The rating agency further said that 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. India’s robust economic expansion is having a constructive impact on its credit metrics. 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 agency also 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 also hopes that these growth dynamics 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.

“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,” it said.