Global rating agency S&P Global Ratings on Thursday, 27 August, affirmed India’s sovereign credit ratings at ‘BBB/A-2’ with a stable outlook, saying that while elevated energy prices and challenging agricultural conditions could marginally slow economic growth this year, the country’s strong economic fundamentals are expected to continue supporting robust growth over the next two to three years.
It said that India’s sovereign ratings continue to be supported by a dynamic and fast-growing economy, a strong external balance sheet, and stable institutions that provide policy predictability. However, it noted that weak fiscal performance, a high debt burden, and low per capita income remain key constraints on the country’s rating profile.
The rating firm expects India’s economic growth to moderate to 6.6% in the current fiscal year due to the ongoing energy shock and challenging agricultural conditions. However, growth is expected to remain robust over the medium term, averaging around 7% annually over the next three years, supported by resilient consumer demand, public investment, and continued economic expansion.
These growth rates place India substantially above its sovereign peers at similar income levels and should continue to underpin increases in fiscal revenue.
Amid lower rainfall due to El Niño and volatile input costs driven by the war in the Middle East, the rural economy has come under pressure. This is significant given that the agriculture sector accounts for about 18% of the Indian economy and employs 43% of the workforce.
However, S&P Global Ratings said the economy’s increasing diversification towards services such as finance and technology, alongside continued infrastructure investment and growth in manufacturing, would act as stabilisers, helping cushion the impact of weak monsoons on the broader economy.
Higher capex by the central government and, to some extent, by state governments will spur investment and construction activity. Based on budget plans for fiscal 2027 and the agency’s expectation of improved capex execution, this support is likely to continue.
Capex push and fiscal consolidation key to strengthening India’s rating profile
The rating agency said the government’s ability to fund large infrastructure investments without substantially widening the current account deficit will be important. It added that a significant reduction in the fiscal deficit while maintaining infrastructure spending could strengthen India’s rating profile over time.
The central government has been tilting towards capital expenditure (capex) spending over the past few years. According to S&P Global Ratings, the slower growth in capital investment announced in the Union Budget for fiscal 2027 does not suggest a deterioration in the quality of government spending.
With economic recovery now on track, the government can depict a more concrete, albeit gradual, path towards fiscal consolidation. India’s current Union Budget reinforces S&P Global Ratings’ expectation of gradual fiscal consolidation.
However, the rating agency expects the impact of a reduction in excise duty on fuel, along with a potentially higher fertiliser subsidy bill, to weigh marginally on the fiscal deficit this year. At the general government level, S&P Global Ratings projects a deficit of 7.3% of GDP in fiscal 2027, which is expected to decline to 6.6% by fiscal 2030.
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