After 14 years, India gets a ratings outlook upgrade from S&P

S&P Global on Wednesday sparked hopes for a long-awaited sovereign ratings upgrade for India, raising its country outlook to positive from stable after 14 years.

The global rating agency cited India's sound economic fundamentals, robust growth momentum and government spending for the decision, while keeping its sovereign credit ratings unchanged at 'BBB-/A-3', the lowest it offers. S&P said cautious fiscal and monetary policy could lead to an improvement in ratings over the next two years.

“The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with a cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months,” the rating agency said.

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A sovereign credit rating measures a government’s ability to repay its debt. A higher rating indicates greater trust in the ability to repay, and consequently, lower borrowing costs. India has maintained that its economic health has improved considerably since the pandemic, and finance ministry officials have met rating agency officials to press for an upgrade.

S&P Global maintained that it anticipates solid consumer and public investment dynamics to propel India's real GDP growth to 6.8% in FY25, 6.9% in FY26, and 7.0% in FY27. Increased capex by the Centre and states will spur investment and construction, S&P Global said, adding based on FY25 budget plans, and its own expectation of strong revenue growth, this support may continue.

Finance minister Nirmala Sitharaman welcomed the outlook upgrade. "This reflects India's solid growth performance and a promising economic outlook for the coming years," she said in a post on X, formerly Twitter. "It has been possible due to the series of macroeconomic reforms undertaken since 2014, along with substantial outlay for capex, fiscal discipline, and decisive & visionary leadership. As envisioned by Hon'ble PM Shri @narendramodi, India is well on track to become the third-largest economy in the third term of the government and become a #ViksitBharat by 2047," she wrote.

 “The outlook change to ‘positive’ from ‘neutral’ is a feather in the cap for the government and shows the positive sentiment about the way the government has managed debt and public finances,” a government official said on the condition of anonymity. The official does not expect any impact on the bond market on account of this.

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According to Sujan Hajra, executive director and chief economist at Anand Rathi Securities, though, the outlook upgrade underscores a larger issue. "The rating methodology employed by S&P and other international credit rating agencies seems unable to keep pace with the dynamic and pervasive transformation of the Indian economy. This rigidity is evident when juxtaposed against India's emergence as a premier destination for foreign investment and one of the leading recipients of both foreign direct investment and foreign portfolio investment in equities," Hajra said. 

The government’s chief economic adviser V. Anantha Nageswaran has previously stated that credit rating agencies need to reform their sovereign rating process to correctly reflect the default risk of developing economies, thus saving billions in funding costs. The “enormous degree of opaqueness” in credit rating methodologies makes it challenging to quantify the impact of qualitative factors on credit ratings, a document from the CEA's office said in December.

“Their effect on the ratings is non-trivial since it implies that to earn a credit rating upgrade, developing economies must demonstrate progress along arbitrary indicators while simultaneously contending with the discriminations the ratings tend to carry," he added.

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Rating agencies use various parameters to rate a sovereign, including growth rate, inflation, government debt, short-term external debt as a percentage of GDP, and political stability. Notably, the outlook upgrade comes at a time India is going through elections to choose a new government, with the ruling Bharatiya Janata Party-led coalition expected to retain power for a third term.

While S&P and Fitch rate India at BBB-, Moody’s rates the South Asian country at Baa3, which indicates the lowest possible investment grade.

The rating agency said it expects India's strong external balance sheet to help the country weather global challenges, while also expecting the resumption of fiscal consolidation, and a gradual decline in the general government deficit that stays high.

Markets expected a rating upgrade, said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

"Market will be cheerful, but not very happy. The government must have also expected a rating upgrade, which would have resulted in lower borrowing costs for market entities," he added

Also read: Reforming sovereign credit rating process need of the hour: CEA