India’s 'BBB-/A-3' Sovereign Rating Affirmed; Outlook Stable

June 10, 2020

NEW DELHI - Global ratings agency Standard and Poors has affirmed India's 'BBB-/A-3' rating and says the outlook is stable. "While risks to India's long-term growth rate are rising, ongoing economic reforms, if executed well, should keep the country's growth rate ahead of peers, " S&P says.

S&P adds: "The economic hit from COVID-19 will exacerbate India's weak fiscal settings. We expect a materially larger fiscal deficit this year, followed by consolidation over the next three years.

"The stable outlook reflects our view that India's economy, and fiscal position, will stabilise and begin to recover from 2021 onwards."

Nevertheless, India's economy is likely to achieve a strong recovery following the deep contraction in this fiscal year;

S&P is forecasting real GDP growth at 8.5% for India in fiscal 2022, and says the economy's long-term outperformance highlights its resilience. "India's wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favour," it says.

"A more favourable corporate tax regime, which is particularly supportive of manufacturing firms, should reinforce growth, alongside additional fiscal and monetary easing."

S&P says it could raise its ratings on India if the Government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general Government level.

Downward pressure on the ratings could emerge over the next one to two years if: (1) India's GDP growth fails to meaningfully recover from 2021 onwards, and its trend growth rate falls towards the average of its peers; or (2) net general Government deficits materially exceed S&P forecasts, signifying a weakening of India's institutional capacity to maintain sustainable public finances.

S&P expects India's economy to contract in fiscal 2021, largely owing to the COVID-19 pandemic,and is forecasting a 5.0% decline in real GDP growth, which would be the worst economic performance in recent history.

"The global economic downturn resulting from the pandemic, along with strict domestic measures aimed at containing the spread of the local epidemic, are hitting the economy hard, and will likely result in a significant fall in activity in the first quarter of this fiscal year (i.e., three months from April 1, 2020)," it says.