 "S&P Global Ratings to observe India's fiscal consolidation for next 2 years")
S&P Global Ratings will closely observe India’s fiscal consolidation path for the next two years. And, it could give a ratings upgrade if the government stays committed to the fiscal glide path, Yeefarn Phua, director, sovereign and international public finance ratings, said.
“Within the next two years, we are closely observing whether the depiction of the government's fiscal consolidation path will carry on,” Phua said during a virtual conference on What's Behind S&P’s Recent Rating Action on India.
S&P Global Ratings on Wednesday raised its outlook for India to ‘positive’ from ‘stable’ while affirming the lowest investment grade sovereign credit rating (BBB-) ahead of the general election results on June 4.
The government, under its fiscal glide path, aims to reduce the fiscal deficit to 4.5 per cent of gross domestic product (GDP) by FY26. The FY25 fiscal deficit target has been set at 5.1 per cent of GDP.
On the bumper Reserve Bank of India (RBI) dividend, Phua said it is favourable to the government's fiscal settings, but overall, from a long-term perspective, S&P does not see such dividends being given on a repeated basis.
Speaking on the recent upgrade of India’s rating from stable to positive ahead of the election results, Phua said India has exhibited national consensus on key economic policies. Phua added that post-election, pro-growth policy orientation will continue.
He said India has enjoyed a consistently-high GDP growth rate despite being governed by different parties and coalitions since the economic liberalisation of 1991.
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“This reflects national consensus on key economic policies. We do believe that post election this pro-growth policy will continue and political commitment of fiscal consolidation will carry on as well for coming years. No matter who the incoming government is, the pro-growth policies, sustained infrastructure investments and the drive to reduce fiscal deficit — these things have produced very good outcomes,” he said.
“Keep in mind that we are yet to see how the government plans to use this dividend,” he added.
The rating agency’s statement comes in the context of the recent larger-than-expected Reserve Bank of India’s (RBI’s) dividend of ~2.1 trillion to the Centre.
India's ability to finance its deficit domestically in its local currency will positively influence the ratings, going forward, the S&P analyst added.
“The quality of the expenditure programme of the government has improved markedly over the past few years. And, that gives us more confidence that growth is going to be sustained at a higher rate in the future,” Phua said.
Improvement in the RBI's monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time could also trigger a ratings upgrade, S&P said.
However, Phua pointed out that erosion of political commitment to maintain sustainable public finances could change S&P’s outlook back to stable.
S&P expects India's medium-term growth potential to be around 7 per cent.
“Once the infrastructure investments are in and connectivity improves, for India to grow at 8 per cent over the longer term is quite possible,” Phua said.