S&P's retains India's sovereign rating at "BBB-" with a stable outlook

S&P Global Ratings on Wednesday retained India's sovereign rating at "BBB-" with a stable outlook, saying that while risks to growth are rising, the economy and fiscal position will stabilise and begin to recover from 2021 onwards.

It said the stable outlook reflects that India's economy will recover following the containment of COVID-19 pandemic and the country will maintain its sound net external position. S&P also said the stable outlook also assumes that the government's fiscal deficit will recede markedly following a multi-year high in the financial year 2021.

The affirmation on stability on India's sovereign rating is a huge relief for the Indian government as it comes at a time when Moody's Investors Service downgraded India's sovereign rating to the lowest investment grade with negative outlook last week. It cited that the country's policy-making institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.

Similarly, FITCH ratings on Wednesday said lack of a credible medium-term strategy for stabilizing rising public debt in India after the coronavirus crisis subsides could put downward pressure on the sovereign rating. It forecast a 5 per cent contraction in GDP in the ongoing financial year but it will bounce back with a sharp growth of 9.5% next year provided it avoids further deterioration in financial sector health.

S&P in its projection said India's economy to contract by 5 per cent this fiscal before making a strong recovery to grow at 8.5% in FY22. It says the economy's long-term outperformance highlights its resilience. It assumes that the government's fiscal deficit will recede markedly following a multi-year high in this fiscal year. It said, well execution of the ongoing economic reforms should keep the country's growth rate ahead of peers despite risk on the country's long-term growth rate is rising.

India's overall external position remains credit strength, largely owing to the economy's limited external indebtedness. It expects that India's current deficit will decline modestly this year and will continue to improve over the forecast period due to its improving terms of trade on weaker oil prices.

Fiscal Deficit

It expects that the government's fiscal deficit will touch 11% of GDP in the current fiscal on the back of the pandemic related spending. It added the government's ability to consolidate its finances once the economy begins to recover will be key in determining the sustainability of India's debt stock. It says India's ratings could be raised if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level.