S &P Global Ratings on Tuesday affirmed its lowest investment-grade sovereign rating (BBB-) for India with stable outlook, holding that the country’s recovery will gain pace through the second half of the fiscal year 2021-22 (FY22) and into the following year, helping stabilize its overall credit profile.
“The stable outlook reflects our expectation that India’s economy will recover following the resolution of the coronavirus pandemic and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next two years,” the rating agency said.
The affirmation comes as a breather for the government amid a rising debt-to-GDP (gross domestic product) ratio, which is projected to have crossed 90% of the GDP in FY21, higher than India’s peers.
The other two key rating agencies, Fitch and Moody’s, have lowest investment-grade sovereign rating for India with negative outlook.
The rating is on expected lines, the chief economic adviser in the finance ministry, K. Subramanian, said in an interview to Mint.
“As we have been saying, growth is most important for debt sustainability, and given the anticipated growth for India this year and going forward, we maintain that the debt sustainability will not be a problem. That is something that the rating agencies have recognized,” he said.
S&P maintained that it may raise the ratings if the Indian economy exhibits a stronger recovery than it expects over the next 24 months, such that the country’s long-term growth outperformance is intact and its fiscal metrics dramatically improve.
“We may also raise the ratings if we observe a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time,” it said.
However, S&P cautioned that it may lower the ratings if India’s economy recovers significantly slower than it expects from FY22 onwards, or net general government deficits and the associated accumulation of indebtedness materially exceed its forecasts, signifying a weakening of India’s institutional capacity to maintain sustainable public finances.
The rating agency said the government’s implementation of economic reforms will be key to sustaining India’s healthy economic growth prospects.
S&P has projected the Indian economy to grow at 9.5% in FY22 over a very weak base of record 7.3% contraction in FY21. It said the government’s robust expenditure programme this year should help the economy heal faster, but will also further strain its weak finances.
“This increasingly tenuous balance may challenge India’s capacity to maintain sustainable public finances and balanced economic growth, if the recovery is slower than we anticipate,” the rating agency said.