In a recent statement, S&P Global Ratings emphasized that India needs substantial fiscal consolidation to improve its credit rating. According to Kim Eng Tan, S&P Global’s Managing Director for APAC sovereign ratings, the starting point of India’s fiscal performance has been weak, and despite recent improvements, it remains below assessed metrics.
S&P currently holds a ‘BBB-‘ rating on India with a stable outlook. Tan noted that unless India achieves more significant fiscal consolidation and reduces deficits beyond recent efforts, an upgrade in the rating is unlikely.
Other global rating agencies, including Moody’s Investors Service, share a similar view, requiring a “much narrower” fiscal deficit than the current target of 4.5 percent of GDP to reconsider India’s fiscal strength.
The Indian government aims for a fiscal deficit of 5.9 percent of GDP for the current financial year, with a long-term goal of reducing it to 4.5 percent by 2025-26. However, the fiscal deficit target of 3 percent, originally set for beyond 2025-26, has been put on hold due to the Covid-19 pandemic.
At the state level, S&P considers the combined debt and deficit indicators of both central and state governments. Indian states are expected to experience a rise in fiscal deficit to 3.1 percent of GDP in 2023-24 from 2.8 percent in the previous fiscal year.
While fiscal metrics present a weakness, India’s GDP has shown robust growth. S&P anticipates India’s GDP to grow by 6.4 percent in 2023-24 and expects sustained growth for the following years.
Kim Eng Tan emphasized that India could potentially see an upgrade in credit ratings through improvements on the fiscal front, acknowledging the nation’s economic growth, deep domestic bond market, monetary credibility, and external balance sheet.
