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NEW DELHI: Rating agency Standard & Poor’s on Friday reaffirmed India’s sovereign rating at the lowest investment grade (BBB-) with stable outlook. It expects Asia’s third largest economy to recover significantly from its estimated record contraction in FY21 due to the coronavirus pandemic, even though worsening weak fiscal settings will constrain the government’s ability to aid the economy.
“The stable outlook reflects our expectation that India’s economy will recover following the resolution of the COVID-19 pandemic, and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months,” it said in a statement.
S&P warned that it may lower the ratings if India’s economy recovers significantly slower than it expects FY22 onwards or net general government deficits and the associated accumulation of indebtedness materially exceed its forecasts, signifying a weakening of India’s institutional capacity to maintain sustainable public finances.
“We may 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,” it added.
S&P said the sovereign credit ratings on India reflect the economy’s above-average long-term real GDP growth, sound external profile, and evolving monetary settings. “India’s democratic institutions promote policy stability and compromise, and also underpin the ratings. These strengths are balanced against vulnerabilities stemming from the country’s low per capita income and weak fiscal settings, including consistently elevated general government deficits and indebtedness,” it added.
The rating agency expects India’s GDP to contract 9% in FY21 before bouncing back to grow at around 10% in FY22. “A significant proportion of this rebound will be due to the very weak base in the current fiscal year. The Indian economy’s long-term outperformance highlights its historical resilience. The country’s wide range of structural trends, including healthy demographics and competitive unit labor costs, work in its favor. These strengths will be challenged by the spread of the pandemic, financial and corporate weakness, and a prolonged decline in investments,” it added.
In June, S&P had retained India’s sovereign rating after Moody’s Investors Service downgraded India’s sovereign rating one notch to the lowest investment grade with negative outlook while Fitch Ratings revised India’s outlook to negative from stable.
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