The rating mirrors the economy’s above-average long-term real GDP growth, sound external profile, and evolving monetary settings, the agency said. Similarly, the outlook “reflects our view that India's recovery will gain pace through the second half of fiscal 2022 and into the following year, helping to stabilise the country’s overall credit profile”.
Global rating agency S&P on Tuesday retained India’s sovereign rating at the lowest investment grade of “BBB-” for a 14th straight year, with a “stable” outlook.
The rating mirrors the economy’s above-average long-term real GDP growth, sound external profile, and evolving monetary settings, the agency said. Similarly, the outlook “reflects our view that India’s recovery will gain pace through the second half of fiscal 2022 and into the following year, helping to stabilise the country’s overall credit profile”.
Nevertheless, India’s fiscal settings are weak, and deficits will remain elevated over the coming years even as the government undertakes some consolidation. But the country’s strong external settings will act as a buffer against Covid-induced financial strains, despite elevated government funding requirements over the next 24 months, S&P said.
In the wake of the second Covid wave, S&P last month trimmed its India growth forecast for FY22 to 9.5% from 11% announced earlier. It now expects GDP to grow at 7.8% in the next fiscal and come down to 6.5% by FY25.
With this, S&P joined a number of agencies in slashing India growth forecasts for the current fiscal, due to the resurgence of infections. Last month, the Reserve Bank of India, too, reduced its FY22 forecast to 9.5% from 10.5%.
On Tuesday, S&P forecast that India’s general government debt will inch up to 90.5% of GDP in FY22 from 90.2% last fiscal. General government deficit will drop from as high as 14.2% of GDP in FY21 but will still remain elevated at 11.7% this fiscal. Fresh measures for fiscal revenue generation will be difficult to implement against a backdrop of economic uncertainty.
“India’s democratic institutions promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and weak fiscal settings, including consistently elevated general government deficits and indebtedness,” S&P said.
Over 20% of the banking sector’s assets are exposed to the government sector, primarily through the ownership of government securities. “Banks have been important participants in financing the government’s higher deficit since the onset of the pandemic, but their rising exposure also indicates a limited capacity, or willingness, to lend more to the state without crowding out private-sector borrowing,” the agency said.