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S&P raises outlook for India to positive, affirms rating at BBB-

May 29, 2024

S&P upgraded India's economic outlook to 'positive' from 'stable', affirming its 'BBB-' rating, the lowest investment grade. Despite elevated fiscal deficit, S&P cited robust growth and fiscal consolidation efforts. India's infrastructure spending and reform continuity bolster growth prospects. Ratings influence borrowing costs, crucial for investors assessing creditworthiness

Rating firm S&P Global Ratings on Wednesday revised outlook for the Indian economy to 'positive' from 'stable' and has affirmed the overall rating at 'BBB-' citing robust growth and improved quality of government expenditure.

'BBB-' is the lowest investment grade rating offered. The last time the agency upgraded the rating outlook was in 2010 when it shifted from negative to stable.

"India's robust economy growth positive impacts credit metrics," S&P said.

"India's fiscal deficit elevated, but consolidation efforts are on. We expect India's fundamentals to aid growth momentum in 2-3 years," the firm added.

Fiscal deficit connect
The agency said that it may upgrade India's rating if the fiscal gap narrows meaningfully. Finance Minister Nirmala Sitharaman announced in the interim Budget that the Indian government expects to bring down the fiscal deficit to 5.1 per cent of GDP in FY25, down from 5.8 per cent in FY24. Fiscal deficit is the difference between government expenditure and revenue.

India is targeting to bring down the fiscal deficit to 4.5 per cent of GDP by FY26, as per the fiscal consolidators roadmap.

Rating agencies opined that the recent dividend boost of Rs 2.11 lakh crore from the Reserve Bank of India could help India's sovereign rating upgrade prospects. Experts note is expected to provide an extra 0.4 per cent of GDP space to the government.

India's infrastructure boost
"The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, could alleviate India's weak public finances. We may also raise the ratings if we observe a sustained and substantial improvement in the central bank's monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time," S&P said.

"The government's infrastructure spend will aid India's growth trajectory. We expect a continuity in India reforms regardless of poll outcome," S&P said. The country is currently voting for the 18th Lok Sabha elections, with Prime Minister Narendra Modi looking increasingly likely to come back to power at the Centre for the third consecutive term come June 4.

In May last year, S&P Global Ratings affirmed India's sovereign rating at 'BBB-' with a stable outlook on growth but flagged weak fiscal performance and low GDP per capita as risks.

All three global rating agencies, Fitch, S&P and Moody's, had the lowest investment grade rating on India with a stable outlook, until today. The ratings are looked at by investors as a barometer of the country's creditworthiness and impact on borrowing costs.

[The Economic Times]

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