S&P upgrades India outlook to ‘Positive’ after a decade

Bengaluru: Ratings agency S&P Global raised its outlook on India to ‘Positive’ from ‘Stable’, and re-affirmed its ‘BBB-’ long-term sovereign rating, citing robust economic expansion in the world’s fastest growing major economy. This will come as a boost to the Modi government’s economic narrative ahead of the last phase of polling in the ongoing general election.

In a report on Wednesday, S&P said that it sees sound economic fundamentals to underpin the growth momentum over the next two to three years, and that regardless of the election outcome, economic reforms and fiscal policies are broadly expected to continue.

“The positive outlook reflects our 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,” it said.

This is S&P’s first outlook improvement on India in nearly 10 years. The ratings and outlook by agencies, especially the ‘big 3’ of S&P, Moody’s and Fitch, are looked at by investors as a barometer of a country’s creditworthiness and impact borrowing costs and investor sentiments.

“The sovereign ratings on India are anchored by a dynamic and fast-growing economy, strong external balance sheet, and democratic institutions that support policy predictability. Counterbalancing these strengths are the government’s weak fiscal performance and burdensome debt stock, as well as low GDP per capita,” it said.

S&P said that the Indian economy has staged a ‘remarkable comeback’ from the Covid-19 pandemic, and expects growth dynamics to continue to play out in the medium term, with the economy growing close to 7% annually over the next three years.

It said that the quality of government spending has improved in the past four to five years, with more budget allocation for infrastructure spending. “We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth.”

The agency said that India’s weak fiscal settings - or budget balancing - had always been the most vulnerable part of its sovereign ratings profile. With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation.

“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,” the agency said.

Reacting to S&P's action, Finance Minister Nirmala Sitharaman called it a 'welcome development'.

"This reflects India's solid growth performance and a promising economic outlook for the coming years. It has been possible due to the series of macroeconomic reforms undertaken since 2014," she said.