S&P affirms India's sovereign rating at 'BBB-', keeps outlook stable

But says country's fiscal settings are weak, and deficits will remain elevated ahead even as the government undertakes some consolidation

Global rating agency Sta­ndard and Poor’s has affirmed India’s sovereign rating at “BBB-” and maintained a stable outlook on gradual recovery in the economy.

India’s recovery will gather pace through the second half of FY22 and into the following year, helping to stabilise the country’s overall credit profile, S&P said in a statement. It, however, warned the country’s fiscal settings were weak, and the deficits would remain elevated over the coming years even as the government undertook some consolidation.

India’s strong external settings help to buffer the risks associated with the government’s high deficits and debt stock.  India’s economy is recovering from a deep contraction in FY21 and a subsequent severe second wave of Covid. “We ex­pect real GDP growth to rebo­und to 9.5 per cent in FY22 on continued normalisation of activity and progressively higher vaccination rates,” the rating agency said. The sovereign cre­dit ratings on India reflect the economy’s above-average long-term real GDP growth, a sound external profile, and ev­olving monetary settings. In­dia’s de­m­ocratic institutions promote policy stability and compromise, and also underpin the ra­t­ings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita inco­me and we­ak fiscal settings, in­cluding co­nsistently elevated ge­neral government deficits, it added. The BJP-led coalition government at the Centre mai­ntains strong support from the electorate. Its implementation of economic reforms will be the key to sustaining India’s heal­thy economic growth prosp­ects.

While India’s economy continues to outperform peers at a similar level of income on a 10-year weighted average real GDP per capita basis, its performance on this metric has weakened. Prior to the onset of the pandemic, the Indian economy had slowed measurably.

The rating agency said the Central government introduced a brawny Budget for FY22 with a 34 per cent boost to capital expenditure. This was over what was initially budgeted in FY21. The Budget follows comprehensive support measures implemented throughout FY21, though direct fiscal injections were modest under that programme.

Although the government’s robust expenditure progra­mme this year should help the economy to heal faster, it will also further strain its weak finances. This increasingly tenuous balance may challenge India’s capacity to maintain sustainable public finances and balanced economic gro­wth if recovery is slower than “we anticipate”, S&P said.

The government’s stimulus measures have leaned heavily on guarantees as well as on the banking sector and the Reserve Bank of India. Amid the second wave of infections from March 2021 onward, the bulk of the support measures has ostensibly been provided by the RBI.

As before, these measures target the hardest-hit individuals, MSMEs, and non-bank financial institutions, and should help to contain immediate stress in the broader financial sector. There is a risk that some damage to the real economy from India’s deep economic downturn last year, and the more recent virus outbreak, could be enduring. 

Implem­entation and acceleration of key reforms could help to address this risk over the next few years, the agency said.

S&P said India’s public fina­nces would remain weak even as the economy normalised. India's fiscal deficit is likely to remain high in FY22, at more than 11 per cent of gross domestic product, amid the economy’s nascent stabilisation.