India’s rating by S&P upgraded from “stable” to “positive”

The recent decision by S&P Global Ratings to revise its outlook on India has stirred discussions among economic analysts, policymakers, and market participants. While such changes often grab headlines, it’s essential to delve deeper into what this really means for India’s economy and why a full-fledged rating upgrade might still be a distant goal.

Understanding S&P’s Outlook Revision

S&P Global Ratings, one of the top three credit rating agencies in the world, assesses the creditworthiness of countries, providing investors with a gauge of risk. An outlook revision typically means the agency has changed its perspective on the future trajectory of the country’s economy. This could be a shift from ‘stable’ to ‘positive’ or ‘negative’ based on various macroeconomic indicators, policy developments, and external factors.

In the case of India, S&P’s recent outlook revision reflects a cautiously optimistic view. This adjustment suggests that while the agency sees potential in India’s economic prospects, several challenges and uncertainties still loom, preventing an outright upgrade of the sovereign credit rating.

Factors Behind the Revision

Several key factors likely influenced S&P’s decision:

Economic Growth: India’s economy has shown resilience and a rebound post-pandemic, driven by strong domestic demand and strategic policy measures. GDP growth rates have been robust, positioning India as one of the fastest-growing major economies globally. (Between 2014 and 2024, India GDP grew from $2Tr to $3.7tr)

Fiscal Deficit and Debt Levels: Despite growth, India’s high fiscal deficit and debt-to-GDP ratio remain concerns. The government’s expansive fiscal policy, while necessary for stimulus and development, poses long-term sustainability questions. For FY25 fiscal deficit levels are determined to be 5.1% of GDP against ~5.8% in FY2024

Inflation and Monetary Policy: The Reserve Bank of India (RBI) has managed inflation relatively well, maintaining a balance between controlling price levels and fostering growth. However, global inflationary pressures could challenge this equilibrium. The MPC hasn’t altered the repo rate since February 2023. There is a hope for bond yields to decline as repo rate gets corrected by end of the year, with inflation coming closer to target rate of 4%.

Structural Reforms: Initiatives like the Goods and Services Tax (GST) and labour law reforms aim to enhance economic efficiency and productivity. Their successful implementation and impact are crucial for long-term growth. India is seeing robust growth in Capex allocation, supported by RBI surplus and also increase in Government Bonds issues with a common goal of Infrastructure development to support the growth economy.

External Factors: Global economic conditions, trade dynamics, and geopolitical tensions also play a role. India’s performance in attracting foreign direct investment (FDI) and managing its external sector impacts credit ratings. With Indian Government Bonds inclusion in the JP Morgan and Bloomberg Emerging Market Index we have seen a massive influx of FPI in Indian Debt market.

Why a Full-Fledged Upgrade is Elusive

While the outlook revision is a positive signal, achieving a full-fledged upgrade is more complex. Several hurdles must be addressed:

Debt and Deficit: Significant reduction in fiscal deficit and public debt levels is crucial. Sustainable fiscal management, reducing reliance on borrowing, and enhancing revenue generation are key. Economists anticipate that rating agencies will closely monitor the public debt-to-GDP ratio, which stands at approximately 83% for FY23 and is projected by S&P to reach 85% in FY24. According to some estimates, this ratio is unlikely to fall below 80% in the near future.

Infrastructure and Human Capital: Continued investment in infrastructure, education, and healthcare is vital. These sectors underpin long-term economic productivity and social stability. Capex allocation in interim budget FY25 was increased only by 11.11% versus 35.9%,24%,42% in FY24,23 and 22 respectively. Experts believe this figure shall be hiked to around 20% in the budget post elections on account of RBI surplus of Rs. 2.11 Lakh crores and increased inflows from both, tax and non-tax avenues.

Policy Consistency and Reforms: Ensuring the continuity and effective implementation of reforms is essential. Frequent policy shifts can undermine investor confidence and economic stability.

Global Economic Conditions: India’s economic trajectory is going to continue to be influenced by global trends. Trade policies, commodity prices, and geopolitical developments can impact growth and stability. However, India has done well in last few years especially with the pandemic and the Ukraine-Russia war impacts being kept at minimal. This indicates that the Global policies are heading in the right direction.

Way forward

While the outlook revision may not immediately translate into tangible benefits, it underscores a positive trajectory. For investors and stakeholders, this signals confidence in India’s economic management, albeit with caution regarding long-term sustainability. According to S&P, India could receive a further upgrade in next 24 months, if it continues its commendable progress.

In the dynamic landscape of global economics, India’s journey towards a higher credit rating is a marathon, not a sprint. The path involves navigating through economic reforms, policy consistency, and global uncertainties, aiming for sustainable growth that stands the test of time.