New Delhi, Aug 27 — Global ratings agency S&P on Thursday affirmed its 'BBB' long-term and 'A-2' short-term sovereign credit ratings on India with a stable outlook, reflecting its expectation that policy stability and high infrastructure investment will support the country’s growth prospects.
"The stable outlook reflects our view that continued policy stability and high infrastructure investment will support India's long-term growth prospects. That, along with stable fiscal and monetary policies that moderate the government's elevated debt and interest burden, will underpin the rating over the next 24 months," S&P said.
High energy prices and challenging agricultural conditions will marginally slow India’s growth this year, it said, adding it expects economic fundamentals to remain sound and support robust growth over the next two to three years. While the Union fiscal deficit may exceed its current budget target, the rating agency believes India remains committed to fiscal consolidation, even as it maintains its strong infrastructure drive.
The sovereign credit ratings on India are anchored by a dynamic and fast-growing economy, strong external balance sheet, and stable 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, according to the S&P report.
"India remains among the best-performing economies in the world. It averaged annual growth of 7.9 per cent in the last five years over fiscal 2022 (year-ended March 31, 2022) and fiscal 2026. We forecast growth to fall to 6.6 per cent this fiscal year on account of an ongoing energy shock and challenging agricultural conditions. But we expect India’s strong growth dynamics to continue in the medium term with GDP growth averaging 7.0 per cent annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite wide fiscal deficits," the report states.
The rural economy will be affected by lower rainfall from El Nino and volatile input costs driven by the Middle East war. The agriculture sector accounts for about 18 per cent of the Indian economy and employs 43 per cent of the workforce. But economic diversification in recent years toward services such as finance and technology, infrastructure investment, and manufacturing will act as stabilisers to cushion the effect of weak monsoons, S&P further stated.
The rating agency also said it may lower the ratings if it observes an erosion of political commitment to consolidate public finances. In addition, downward pressure could also come from India's economic growth slowing materially on a structural basis such that it undermines fiscal sustainability.
On the other hand, S&P said it may raise the ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6 per cent of GDP on a structural basis. The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, would alleviate India's weak public finances.