S&P Upgrades India’s Sovereign Rating To ‘BBB’ After 18 Years, Cites Economic And Political Resilience

Mumbai: S&P Global Ratings on Thursday raised its long-term unsolicited sovereign credit ratings on India to ‘BBB’ from ‘BBB-‘, and its short-term ratings to ‘A2’ from ‘A-3’. The revised investment grade rating comes after over 18 years. Economic gurus and analysts attribute the upgrade to India’s economic and political resilience, and sustained fiscal consolidation. The outlook on the long-term rating is stable. S&P’s ‘BBB’ is an investment grade rating, and indicates India’s improved ability to discharge its debt obligation comfortably.

S&P Cautions on Fiscal, Growth Risks

The agency, however, warned that it may lower the ratings if it observes an “erosion of political commitment” to consolidate public finances. Downward pressure could also come from the economic growth slowing materially on a structural basis, including a potential weaknessin fiscal sustainability. In January 2007, the agency had placed India on the “lowest investment grade rating” of ‘BBB-’.

On reciprocal tariffs and trade wars, S&P said, the effect of US tariffs on India will be manageable as it is relatively less reliant on trade, and about 60% of the country’s economic growth stems from domestic consumption.

“We expect that in the event India has to switch from importing Russian crude oil, the fiscal cost, if fully borne by the government, will be modest given the narrow price differential between Russian crude and current international benchmarks,” official sources at S&P told The Free Press Journal.

Since the beginning of economic liberalisation in 1991, India has had consistently high GDP growth while governed by different political parties and coalitions— reflecting a consensus on key economic policies. The agency has also revised its transfer and convertibility assessment to ‘A-’ from ‘BBB+’.

Stable Rating Outlook for Next Two Years

“The stable outlook reflects our view that continued policy stability and high infrastructure investment will support India’s long-term growth prospects. That along with cautious fiscal and monetary policy that moderates the government’s elevated debt and interest burden will underpin the rating over the next 24 months,” official sources said.

“We may raise the ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6% of GDP on a structural basis. The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, would alleviate India’s weak public finances,” the agency said. The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations. Together with the government’s commitment to fiscal consolidation and efforts to improve spending quality, “we believe these factors have coalesced to benefit credit metrics,” the agency underlined.

Notably, in April 2012, S&P had lowered India’s rating outlook to “negative” from “stable”. In a report, entitled, “Will India be the first Bric fallen angel?” the agency had highlighted the division of roles between the “powerful” Congress party president and an “unelected” prime minister as the main reason behind the poor state of the economy. India had dismissed the rating agency’s warning that India could be the first Bric nation to lose its investment grade status. Pranab Mukherjee, the then finance minister had said the agency’s report was “not based on a fresh rating action”.