S&P follows Fitch, affirms India’s sovereign rating at ‘BBB-’

Better performance amid challenging global conditions and the possibility of high growth in coming years prompted S&P Global Ratings to affirm India’s sovereign rating at ‘BBB (-)’ with stable outlook. This is the last investment grade and in line with other agencies. Investors, especially from foreign nations, depend upon such a rating for making decisions about a company.

“The sovereign credit ratings on India are anchored by the country’s dynamic, fast-growing economy, strong external balance sheet, and democratic institutions supporting policy predictability and compromise,” the agency said, while giving its rationale for affirmation. However, it cautioned that these strengths are counterbalanced by the government’s weak fiscal performance and burdensome debt stock, as well as the economy’s low GDP per capita.

Finance Ministry was hopeful about a rating upgrade. S&P Global followed Fitch with the same ratings and stable outlook. “The stable rating outlook reflects our expectation that India‘s sound economic fundamentals will be sufficient to offset the government’s weak fiscal performance, helping to sustain elevated government funding needs and a high interest burden over the next 24 months,” the agency said. It noted that India‘s economy is set for real GDP growth of about 6 per cent this year, which compares favourably with emerging market peers amid a broad global slowdown. Investment and consumer momentum will underpin solid growth prospects over the next three to four years.

Moderate exposure

The economy has a more moderate exposure to a slower external backdrop than regional peers. “India‘s economy has emerged from the pandemic-driven downturn into a rapid recovery phase. Two straight years of above-trend real GDP growth illustrates this. The pace of economic expansion is normalising toward a more sustainable level. Fiscal year ending March 31, 2024 will also be subject to comparison with a strong year-ago base,” it said.

The agency said that the performance of the Indian economy in the past several years highlights its historical resilience. “Our projections for solid growth against increasing external headwinds are also predicated on the country’s constructive structural trends. These include healthy demographics and competitive unit labour costs. Additionally, we believe India‘s corporate and financial sectors have stronger balance sheets than before the pandemic,” it said. Nevertheless, the economy maintains good momentum. We anticipate solid consumer and investment dynamics will propel real GDP growth to 6 per cent in fiscal 2023-24 and 6.9 per cent in 2024-25 and 2025-26.

The agency, however, said that India faces a shortfall in the provision of basic goods and services, particularly in the more rural parts of the country. India will likely need to improve its physical infrastructure to raise its investment potential and competitiveness. The high financial cost of addressing this shortfall constitutes a future liability to the sovereign, although the Centre is increasingly making such expenditure,” it said.