Reining in fiscal deficit key to India keeping investment grade rating: S&P

Higher government deficits and higher debt stock over an extended period is the key risk to India's investment grade credit rating, Andrew Wood, director Asia-Pacific Sovereign Ratings at S&P Global Ratings, warned on Wednesday.

S&P currently has India at "BBB-", its lowest investment grade rating, with a stable outlook.

"We will be watching the balance between the economy and the fiscal settings in India very closely going forward because in our opinion higher growth rates over the next few years are going to be critical to contain, maintain and finance the government's higher fiscal deficits and debt stock," Wood said during a webinar.

He said there are signs of stabilisation in the economy especially over the last four to five months and S&P is seeing a good potential for India to "somewhat rebound" in the fiscal year starting April.

However, he emphasised that maintaining the high nominal and real growth will be key.

Wood said with growth rebounding by 10% in the next fiscal year will only take India to GDP levels seen in FY20 and would mean a permanent loss of 10% of production as compared to the pre-pandemic path that the economy was on.

S&P is also closely monitoring the country's vaccination drive to see how the government manages to inoculate at least a vast majority of the 1.4 billion population by the end of 2022.

Among risks to the economy, Wood said a second and larger wave of infections in India can pose a significant risk, as it has in other global economies, while inflation also needs to be watched as it could prompt the central bank to hike rates a bit more quickly and sooner than expected.

Any premature withdrawal of the fiscal support by other economies globally which are seeing nascent recoveries could also have knock-on impact on India, he added.

"The government's more aggressive fiscal stance as presented at the budget earlier this month should be supportive of the recovery," he said.

India set a fiscal deficit target of 6.8% of GDP for the year ending March 2022 and said it aims to bring down the fiscal deficit to 4.5% of GDP by 2025/26.

"It will be critical for economy to maintain a relatively high growth to ensure fiscal deficits don't stay in double digit territory for an extended period of time. If that happens we will begin to have more concerns," Wood said.