On Wednesday, 29th May, S&P Global raised India's country outlook to positive from stable for the first time in 14 years, citing strong economic fundamentals, robust growth, and government spending. The sovereign credit ratings remain unchanged at 'BBB-/A-3'. S&P noted that cautious fiscal and monetary policies could potentially improve the ratings within the next two years.

India's credit rating, evaluated by global rating agencies, serves as a crucial indicator of the country's economic health and fiscal stability. With the recent outlook that is changed to positive, India is poised to be placed as a favourite when it comes to foreign investments. But, what actually is a credit rating and how does it work for the nation's benefit? Let’s learn this in detail in this blog.

Credit Rating and its Importance

A country's credit rating evaluates its creditworthiness, indicating its ability to repay debts. Provided by agencies like S&P, Moody's, and Fitch, the rating reflects economic health, fiscal policy, debt levels, political stability, and external factors. Ratings range from investment grade (AAA, AA) to non-investment grade (BB, B), affecting interest rates, investor confidence, and borrowing costs. Higher ratings lower borrowing costs and attract more investors, while lower ratings increase costs. The rating process involves data collection, analysis, and periodic reviews. Credit ratings are crucial as they influence investment decisions, access to capital markets, and overall economic stability.

India’s Sovereign Rating and Economic Outlook

The sovereign rating of a country is a vital measure that impacts its ability to attract foreign investment and access international capital markets. For India, this rating has been a topic of much interest, especially in light of recent improvements. S&P Global Ratings has revised its outlook on India's sovereign credit rating to positive from stable, affirming the 'BBB-/A-3' foreign and local currency ratings. This move reflects the rating agency's confidence in India's robust economic growth, improving quality of government spending, and commitment to fiscal consolidation.

Economic Recovery and Growth

• Robust Economic Expansion: India has demonstrated a strong economic recovery from the disruptions caused by the COVID-19 pandemic. Over the past three years, the country’s real GDP growth has averaged 8.1% annually, the highest in the Asia-Pacific region. This growth is driven by a combination of increased capital expenditure by the government, a strengthening labour market, and solid structural trends, including competitive labour costs and a young, dynamic population. Rating agencies project that India’s GDP will continue to grow at approximately 7% annually in the coming years.
• Fiscal Consolidation: Despite challenges such as high fiscal deficits and significant public debt, the Indian government has committed to fiscal consolidation. This involves measures to reduce deficits and manage debt effectively. Rating agencies anticipate that the general government deficit will decline from 7.9% of GDP in fiscal 2025 to 6.8% by fiscal 2028, reflecting these ongoing efforts to enhance fiscal health.

Factors Contributing to the Positive Outlook

Several key factors have contributed to the positive shift in India’s credit rating. These include economic reforms, increased infrastructure investment, and focused fiscal consolidation efforts.

1. Consistency in Economic Reforms and Policy Stability

One of the main reasons behind the improved credit rating is the expectation of broad continuity in economic reforms and fiscal policies, regardless of the outcomes of upcoming elections. This stability, along with a commitment to ongoing reforms, has instilled confidence in India’s long-term economic prospects. Since the beginning of economic liberalization in 1991, India has consistently maintained high GDP growth under various political parties and coalitions, reflecting a broad consensus on key economic policies.

2. Increased Infrastructure Investment

The Indian government has significantly increased its investment in infrastructure, marking a strategic shift in spending priorities. This move is aimed at alleviating bottlenecks and facilitating higher economic growth. Investments in critical sectors such as transportation, energy, and telecommunications are expected to improve the country’s competitiveness and support sustained economic growth.

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Boosting Manufacturing: The government has also introduced production-linked incentive schemes targeting sectors like electronics and automobiles. These incentives aim to attract foreign investment and diversify supply chains, further stimulating economic growth. Additionally, ongoing efforts to liberalize the labour market are expected to support the creation of higher-earning manufacturing jobs, boosting economic development.​​​​​​​

3. Fiscal Consolidation Efforts

Managing fiscal deficits and public debt remains a critical focus for the Indian government. Despite the challenges, there is a clear commitment to fiscal discipline. The central government plans to reduce its deficit to 5.1% of GDP by fiscal 2025 and to 4.5% by fiscal 2026. This disciplined approach is crucial for maintaining macroeconomic stability and enhancing India’s credit profile.

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External Position and Current Account Deficits

• Strong External Position: The external position of a country refers to its financial and economic relationships with the rest of the world. It encompasses all the assets and liabilities a country holds with foreign entities, and it plays a crucial role in determining the country’s economic stability and creditworthiness.
  India’s strong external position, reflected in a favourable balance of international assets and liabilities, supports its credit rating. The Indian rupee’s active trading status in global foreign exchange markets further enhances this position, providing liquidity and stability.
• Limited External Debt: Prudent management of external debt has kept India’s exposure relatively low, reducing the risks associated with currency and capital flight. Rating agencies view this limited external debt as a positive factor, contributing to the country’s overall credit profile.

Conclusion

India's improved credit rating reflects its strong economic growth, strategic fiscal policies, and significant infrastructure investments. The nation's resilience, policy continuity, and commitment to reforms have boosted confidence in its long-term growth prospects. Despite challenges like high fiscal deficits and public debt, ongoing fiscal discipline and infrastructure investments are expected to mitigate these issues. The positive outlook indicates that sustained policy stability, deepening reforms, and substantial infrastructure investments will support India's growth momentum, potentially leading to a higher credit rating in the next two years. This trajectory enhances India's economic stability and attractiveness to foreign investors, positioning it well for future challenges and opportunities.

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