Next govt's fiscal moves key to sovereign rating: S&P Global Ratings

S&P said following nearly a decade of rule by the BJP-led NDA govt, a change in the ruling coalition could bring a period of policy uncertainty

S&P Global Ratings on Monday said India’s sovereign rating support may strengthen over time if the next government — post general elections — could fund large infra projects without widening the country’s current account deficit and can shrink the fiscal deficit significantly.

“Our sovereign ratings on India will still depend on economic growth trending above average and strong external metrics. Success of the next government in funding large infrastructure investments without widening the country's current account deficit will remain important,” S&P said in a report summarising sovereign credit issues in elections in Asian economies in 2024.

The general election is likely to be held in April-May this year. S&P said following nearly a decade of rule by the Bharatiya Janata Party (BJP)-led National Democratic Alliance government, a change in the ruling coalition could bring a period of policy uncertainty. 

“Investors and businesses may take some time to decide if India's strong growth could continue under a government led by a different coalition. Most market commentators, however, are projecting that the BJP will continue to lead the next government,” it added.

Fitch Ratings, in a separate report, said the incoming government will provide further clarification of its fiscal plans once it has taken office since the latest Budget is an interim one.

“Pre-election Budgets tend to contain limited policy announcements, but budget deficit targets are typically carried through to the post-election Budget when the incumbent government returns to office, as we believe it is likely this year,” it added.

Fitch said the central government’s latest interim Budget points to a slightly faster pace of consolidation in the next two financial years than it previously expected, and reinforces its commitments to raise capital investment. “The targets are broadly in line with Fitch's assumptions when we affirmed India’s rating at ‘BBB-’ with a stable outlook in January. As such, they are unlikely to lead to significant changes in the sovereign’s credit profile, although this modestly reduces near-term risks to the fiscal trajectory and signals the government’s commitment to its fiscal consolidation plans,” it added.

The government decided to lower its fiscal deficit target for FY24 to 5.8 per cent of GDP from 5.9 per cent. It pegged the deficit target at 5.1 per cent for FY25 in order to reach its medium-term goal of narrowing the deficit to 4.5 per cent of GDP in FY26.

“We still think it will be challenging for the government to achieve its FY26 deficit target. Trade-offs between economic growth and consolidation are likely to become more acute in the coming years. We expect the government to maintain a core focus on economic growth outcomes, particularly by sustaining strong capex,” Fitch said.

However, Fitch said, the government’s emphasis on deficit reduction should help to slightly reduce the high debt ratio over the medium term. “We forecast the government debt to GDP ratio to decline marginally over the next five years to just above 80 per cent of GDP. This is based on a continued path of gradual deficit reduction, as well as robust nominal growth of around 10.5 per cent of GDP,” it added.