S&P affirms India’s sovereign rating on fast-growing economy, strong balance sheet; flags low GDP per capita

S&P affirms India’s sovereign rating on fast-growing economy, strong balance sheet; flags low GDP per capita

18 May    Economy, Finance News

S&P Global Ratings on Thursday affirmed India’s sovereign rating at ‘BBB-‘ with a stable outlook saying strengths lie in a fast-growing economy and strong external balance sheet but flagged weak fiscal performance and low GDP per capita.It said the Indian economy is set for real GDP growth of about 6 per cent in 2023, which compares favourably with emerging market peers amid a broad global slowdown. Investment and consumer momentum will underpin solid growth prospects over the next 3-4 years.

“S&P Global Ratings affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term unsolicited foreign and local currency sovereign credit ratings on India. The outlook on the long-term rating is stable,” the US-based agency said in a statement.’BBB-‘ is the lowest investment grade rating.The stable outlook on the long-term rating reflects S&P’s view that India’s strong economy and healthy revenue growth will support its weak fiscal settings.

“The sovereign credit ratings on India are anchored by the country’s dynamic, fast-growing economy, strong external balance sheet and democratic institutions supporting policy predictability and compromise. These strengths are counterbalanced by the government’s weak fiscal performance and burdensome debt stock, as well as the economy’s low GDP per capita,” S&P said.S&P is the second global rating agency after Fitch to affirm India’s sovereign rating and stable outlook in 2023. Fitch too had last week affirmed India’s rating at ‘BBB-‘ with a stable outlook, citing robust growth and resilient external finances.All three global rating agencies — Fitch, S&P and Moody’s — have the lowest investment grade rating on India with a stable outlook.

The ratings are looked at by investors as a barometer of the country’s creditworthiness and impact on borrowing costs.S&P, in the statement, said it anticipates solid consumer and investment dynamics will propel real GDP growth to 6 per cent in fiscal 2024 and 6.9 per cent in fiscal years 2025 and 2026.Surging capital expenditure (capex) by the central government and, to some extent, by state governments will help to revive investment and spur construction activity. Based on budget plans for fiscal 2024 and our expectation of strong revenue growth, we believe this support will continue during the current fiscal year.

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“The coalition government led by the Bharatiya Janata Party retains a healthy majority in the Lok Sabha, India’s lower house of parliament. This supports the government’s efforts to implement economic reforms. That said, major new reforms are unlikely over the next 12 months until the 2024 parliamentary elections are over,” S&P said.It said despite strong revenue gains, India’s fiscal consolidation has trailed that of regional peers at a similar rating level. Nevertheless, we believe the general government will gradually pare down its sizable deficits over the next few years to about 7.3 per cent of GDP by fiscal 2027.S&P forecasts overall net general government debt to stabilise just below 85 per cent of GDP over the next three years. This is higher than India’s pre-pandemic net debt stock of 75 per cent of GDP, but well below the pandemic peak of greater than 90 per cent.

“India’s strong external position highly supports its credit profile. Despite a return to current account deficits over the past two years, the country retains a modest net external creditor position.”Current account deficits are likely to moderate over the next few years as domestic demand stabilises and the weaker rupee boosts competitiveness. Higher commodity prices are an enduring upside risk to our current account projections,” it added.

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