S&P affirms 'BBB-' long-term credit rating for India; outlook stable

S&P Global has affirmed its 'BBB-' long-term, the lowest investment grade score, and 'A-3' short-term unsolicited foreign and local currency sovereign ratings on India. The ratings action came on the back of  coronavirus pandemic and subsequent lockdown measures coupled with cyclical downturn in the Indian economy. The ratings agency has kept its outlook for India stable, indicating optimism that the nation's economy will significantly recover after contracting in fiscal 2021, which will stabilise the country's broader credit profile.

The global ratings agency said that it may lower India's credit rating if economic recovery from fiscal 2021 onwards is significantly slower than expected, or net general government deficits and the associated accumulation of indebtedness materially exceed earlier forecasts, which will indicate a weakening of India's institutional capacity to maintain sustainable public finances.

S&P Global said it might raise the ratings "if the Indian economy exhibits a stronger recovery than we expect over the next 24 months, such that the country's long-term growth outperformance is intact and its fiscal metrics dramatically improve".

"While India's economy continues to outperform peers at a similar level of income on a 10-year weighted average real GDP per capita basis, its performance on this metric has weakened somewhat," the agency said in its ratings statement.

The agency pointed out that Indian economy has slowed down a great deal prior to the onset of coronavirus pandemic. "Existing vulnerabilities, including a weakened financial sector, rigid labour markets, and weak private investment, could hamper the economic recovery, especially in view of the deeper downturn this year than we expected," S&P Global said.

S&P Global said it expects economic activity in India to normalise in fiscal 2022, taking real GDP growth to 10 per cent. A substantial part of it would be due to the very weak base in the ongoing financial year, it further added.

"We believe the pandemic has exacerbated India's key credit weaknesses: Its historically high general government deficits and elevated debt stock. These developments contrast with continued improvement in India's external settings. Additional expenditure measures to support the economy and much weaker revenue generation will likely lead to a surge in India's general government deficit to more than 12 per cent of GDP this year," said S&P Global.

"The government's revenue outlook this year has weakened further, in tandem with our expectations of a slower economic recovery. While some expenditure rationalisation will help to contain the spike in overall deficit versus the trend seen in the first four months of the fiscal year, we believe revenues will take longer than initially anticipated to normalise," it further added.

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