Behind S&P's Recent Outlook Upgrade For India
Large debt stock and interest burden persist, though government is prioritising consolidation efforts, S&P said.
S&P Global Ratings continued to emphasise the government's need to rein in the central and state fiscal deficits for a ratings upgrade.
The ratings agency revised India's sovereign outlook from 'stable' to 'positive' on Wednesday, citing confidence in the country's policy stability, economic reforms, and infrastructure investments. The agency maintained its 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings.
In a webinar on Thursday, the global ratings agency explained its reasons for the outlook upgrade:
Robust economic expansion that is benefiting credit metrics.
Marked improvement in the quality of government spending.
The fiscal deficit is still elevated but efforts are in consolidation.
Credibility of the monetary regime in managing inflation.
Broad continuity in economic reforms and fiscal policy.
"In our view, the success of the next government in funding large infrastructure investments without substantially widening the country's current account deficit will be important," S&P Global stated. Ratings support would strengthen if the fiscal deficit shrinks significantly while achieving these objectives, it said.
Large debt stocks and interest burdens persist, though the government is prioritising consolidation efforts, S&P said. While India's weak fiscal settings have always been the most vulnerable part of its rating profile, with economic recovery on track, the government is able to depict a path to fiscal consolidation. However, the government debt burden is expected to remain elevated in the coming years, higher than the pre-pandemic level but well below the pandemic peak. The interest service burden, too, remains onerous, it said.
"For a ratings upgrade, we are observing the government closely over the next two years to see commitment to fiscal consolidation," the ratings agency said.
India’s fiscal performance at a general government level, as compared with emerging economies, remains relatively weak, with several emerging economies in Asia having a lower fiscal deficit, it said.
The RBI dividend, while favourable to the government’s fiscal path, is being treated as a one-off and not a recurring event in the medium term, the agency said.
India's potential growth is expected to be around 7%. This is sustainable. and can be even higher if not for some bottlenecks, according to it.
