Fitch re-rating US won’t impact India, says S&P Global’s Atul Arya

India may not face any significant fallout from Fitch Ratings downgrading US sovereign credit citing ballooning fiscal deficit and erosion of governance.

India may not face any significant fallout from Fitch Ratings downgrading US sovereign credit citing ballooning fiscal deficit and erosion of governance, said Atul Arya, Senior Vice President and Chief Energy Strategist, S&P Global Commodity Insights.

“In terms of longer-term trends, we do not see any impact on India,” Arya told Moneycontrol in an interview on August 3. Terming the South Asian nation a “bullish emerging market”, he further said that there seems to be no rethinking on big investments coming into India, at least from the US, even after the re-rating.

“I haven’t seen any commitments being pulled out or downgraded due to the re-rating. India is a growth story. We will see bumps in the world, including in India, but the challenge and opportunity for the Indian government and people lies in how they tackle the bumps and keep growing,” Arya said.

Fitch Ratings has downgraded US sovereign credit by one level, from AAA to AA+. The downgrade echoes a similar move by Standard & Poor’s Global Ratings in 2011, when the US government did not increase the borrowing limit in spite of growing debt. The standoff then had raised the US Treasury’s borrowing costs by $1.3 billion that year, per a 2012 report by the Government Accountability Office.

The Fitch report cited "a steady deterioration in standards of governance over the last 20 years" and said that "repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management."

Arya said that India has one of the best demographics in the world, but in order to take advantage of this dividend, the South Asian nation needs to increase the participation of women in the workforce, which is “much lower” than the global average. A report by S&P Global titled Look Forward: India's Moment, released on August 3, said that as of 2022, women comprised only 24 percent of the country’s manpower.

India is now the most populous country in the world, surpassing China, per a United Nations Population Fund (UNFPA) report in April 2023. Experts believe that India's demographic advantage — its young population — and it’s consumer-driven economy, will be significant factors in driving the country's development, and present an enormous opportunity for economic growth.

Asked whether India risks missing the bus on becoming a leading power, Arya said there are both geopolitical and domestic challenges. He cited climate change as one of key risks for India and the world, adding that though 40 percent of Indian companies are already looking at risks associated with climate change, they have to take steps to become more resilient.

Fiscal tightening

Applauding India for steering a stable fiscal policy, Arya said that though there has been “so much fiscal tightening across the world, in India it’s been small, at only 250 basis points.”

He added that India has not been impacted by global challenges, particularly fiscal challenges such as from the Organisation for Economic Co-operation and Development (OECD).

“We expect further tightening in the US as the Fed (Federal Reserve) has said that it is not quite done, though it may slow things down. India’s central bank will have to see how they see all this fiscally. But India’s economy and overall balance sheet is very strong right now,” Arya said.

The Reserve Bank of India has raised the benchmark repo rate by 250 basis points (bps) to 6.5 percent in 2022-23, but kept it unchanged in 2023-24 as the Consumer Price Index (CPI) inflation fell sharply, hitting a 25-month low of 4.31 percent in May. However, data for June released on July 12 showed inflation had snapped a four-month falling streak and risen to 4.81 percent, higher than economists’ expectations of 4.6 percent. One basis point is one-hundredth of a percentage point.