S&P bumps up India's outlook to positive betting on policy continuity post polls

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Ratings agency S&P on May 29 stated that it has revised outlook for India to positive from stable on robust growth and rising quality of government spend.

"The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months," S&P said in a statement.

Along with that, the ratings agency affirmed our 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings.

“We expect sound economic fundamentals to underpin the growth momentum over the next two to three years,” the ratings firm added.

Further, as the country is witnessing the largest democratic elections, which will go for its seventh and last phase of voting on June 1 and declare the results on June 4, S&P highlighted, “Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies.

On a further upside scenario for India, S&P said that it may raise the ratings if the country's fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7 percent of GDP on a structural basis.

"The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, could alleviate India's weak public finances."

It also said that it may raise the ratings if it observes "sustained and substantial improvement" in Reserve Bank of India's monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time.

Union Finance Minister Nirmala Sitharaman welcomed S&P Global Ratings' upgrade of India's outlook, highlighting the country's robust growth and promising economic future. Sitharaman said this improvement is credited to the macroeconomic reforms since 2014, significant capital expenditure, fiscal discipline, and strong leadership. As envisioned by Prime Minister Narendra Modi, India is on track to become the third-largest economy during the government's third term and achieve Viksit Bharat status by 2047, the FM said.

On the downside scenario, the ratings agency also mentioned that it may revise the outlook to stable if 'we observe an erosion of political commitment to maintain sustainable public finances, which in turn signifies a weakening of the country's institutional capacity." Also, if current account deficits widen materially to weaken India's external position such that the country becomes a narrow net external debtor, the rating can be downgraded to stable from stable.

S&P also said that it forecasts India's real GDP growth at 6.8 percent this year, which compares favorably with emerging market peers amid a broad global slowdown. The government is scheduled to release GDP data for January-March quarter on May 31.