India’s Economic Outlook: A Commentary on S&P Global Affirmed Rating BBB-/A-3′

S&P Global’s recent revision of India’s economic outlook fromstable’ to ‘positive’ is a endorsement of the country’s growth trajectory and improving fiscal metrics. This development is a evidence of India’s economic spectrum. It is characterized by sustained reforms and strategic government spending. In this article, I will delve into the implications of S&P’s assessment, providing a critical analysis based on India’s historical economic context and current challenges.


Point #1: Historical Context

India’s economic journey over the past decades has been through transformative reforms and near stable growth. The liberalization of the economy in 1991 set the stage for faster industrialization and integration into the global market. Introduction of the Goods and Services Tax (GST) in 2017 and the ongoing infrastructure push have further strengthened the economic foundation of India.

Examining historical data reveals significant fluctuations in key economic indicators.

  • The current account deficit (CAD) has varied, with notable peaks such as -3% of GDP in 1989-1990 and -4.8% in 2011-2012.
  • The fiscal deficit has also seen substantial highs, reaching 9.2% of GDP in 2020-2021 due to pandemic-related spending.
  • The debt-to-GDP ratio has risen considerably, from 45% in 1980-1981 to a projected 87.02% in 2023-2024.

Point #2: Current Account Deficit, Fiscal Deficit, and Debt-GDP-Ratio of India Since 1980

Fiscal Deficit, Current Ac Deficit, Debt-GDP-Ratio
YearCurrent A/c
Deficit (% of GDP)
Gross Fiscal
Deficit (% of GDP)
Debt GDP
Ratio (%)
1980-1981-1.75.5545.00Pre Liberalization
1981-1982-1.74.9348.92Pre Liberalization
1982-1983-1.55.4053.29Pre Liberalization
1983-1984-1.15.6952.55Pre Liberalization
1984-1985-2.16.7955.95Pre Liberalization
1985-1986-1.87.5560.51Pre Liberalization
1986-1987-1.78.1364.85Pre Liberalization
1987-1988-2.47.3468.15Pre Liberalization
1988-1989-27.0867.70Pre Liberalization
1989-1990-37.1070.60Pre Liberalization
1990-1991-0.47.6168.85Pre Liberalization
1991-1992-1.45.3972.89Post Liberalization
1992-1993-0.45.1972.00Post Liberalization
1993-1994-16.7672.39Post Liberalization
1994-1995-1.65.5270.00Post Liberalization
1995-1996-1.24.9167.28Post Liberalization
1996-1997-1.34.7064.37Post Liberalization
1997-1998-15.6666.29Post Liberalization
1998-1999-16.2967.11Post Liberalization
1999-2000-0.65.1870.47Post Liberalization
2000-2001-0.75.4673.67Post Liberalization
2001-20021.25.9878.79Post Liberalization
2002-20032.35.7282.86Post Liberalization
2003-2004-0.34.3483.23Post Liberalization
2004-2005-1.23.8882.13Post Liberalization
2005-2006-13.9679.07Post Liberalization
2006-2007-1.33.3274.66Post Liberalization
2007-2008-2.32.5471.44Post Liberalization
2008-2009-2.85.9972.21Post Liberalization
2009-2010-2.96.4670.60Post Liberalization
2010-2011-4.34.7965.60Post Liberalization
2011-2012-4.85.8467.39Post Liberalization
2012-2013-1.74.9166.65Post Liberalization
2013-2014-1.34.4367.00Post Liberalization
2014-2015-1.14.0966.58After 2014
2015-2016-0.63.9468.53After 2014
2016-2017-1.83.5068.77After 2014
2017-2018-2.13.5069.57After 2014
2018-2019-0.93.4070.53After 2014
2019-20200.94.6075.33After 2014
2020-2021-1.29.2089.45After 2014
2021-2022-26.7085.21After 2014
2022-2023-1.656.4086.54After 2014
2023-2024-1.26.4087.02After 2014

Point #3: Current Economic Scenario

As per S&P Global, India’s real GDP growth is forecasted to average around 7% annually over the next few years. This is positioning India as one of the fastest-growing major economies. This growth is driven by robust consumer demand and sustained public investment in infrastructure.

The administration’s focus on capital expenditure, particularly in sectors such as transportation and energy is worth noting. It is expected to alleviate infrastructure bottlenecks in India and drive long-term economic expansion.

However, the fiscal deficit remains elevated.

  • Fiscal Deficit: The projections indicating a gradual decline from 7.9% of GDP in FY25 to 6.8% by FY28.
  • The current account deficit, Though manageable, poses a risk if global economic conditions deteriorate or oil prices surge. Given India’s dependency on energy imports is very high, the risk of deficit expansion is also noted.

Point #4: S&P Global’s Assessment

S&P Global’s recent affirmation of India’s ‘BBB-/A-3’ sovereign credit ratings, along with an upgraded positive outlook, carries positive implications for the country’s economic narrative. There are three key elements in the S&P Global’s assessment of India economic outlook:

4.1 Credit Ratings ‘BBB-/A-3’:

The BBB- rating places India at the lower end of the investment-grade category. This rating suggests that India has a good capacity to meet its financial commitments. However, the rating agency is somewhat susceptible to adverse economic conditions and changes in circumstances.

Here is a list of a few countries that have a BBB- rating from S&P


Source: Trading Economics

The A-3 rating indicates a satisfactory short-term credit quality. It means that India has adequate capacity to meet its short-term obligations. This rating helps investors assess the risk of default in the short term.

Specifically, it signifies that the issuer has satisfactory short-term debt-paying capacity. While it is not the highest rating (such as ‘A-1’), ‘A-3’ still indicates a relatively strong capacity to fulfil short-term financial obligations.

For investors and financial markets, an ‘A-3’ rating offers a level of assurance about the issuer’s creditworthiness (for short-term instruments). Instruments such as commercial paper or other debt securities with a maturity of one year or less are covered under this rating.

[Note: As of 2024, S&P Global has rated China at A+, Bangladesh at BB-, and Brazil at BB-. These ratings reflect the varying economic conditions and creditworthiness of each country as perceived by S&P Global. China’s higher rating (A+) indicates a stronger capacity to meet financial commitments compared to India (BBB-), Bangladesh (BB-), and Brazil (BB-)​]

4.2 Positive Outlook

The shift from a “stable” to a “positive” outlook suggests that there is at least a one-in-three chance that India’s credit rating could be upgraded in the next 12 to 24 months. This will happen if the country continues to demonstrate robust economic growth and fiscal improvement.

The positive outlook is contingent upon the expectation of continued policy stability. This includes consistent implementation of economic reforms, prudent fiscal management, and effective governance.

Stability in policy is crucial for maintaining investor confidence.

4.3 Economic Resilience

S&P Global recognises India’s strong economic growth trajectory. With an expected real GDP growth of about 7% CAGR over the next few years, India is one of the fastest-growing major economies. This growth is driven by robust consumer demand, significant public investment in infrastructure. The dynamic services sector of India also plays it part in the GDP expansion.

The agency highlights the improved quality of government spending as a positive factor. Recent budgets have prioritised capital expenditure, especially in infrastructure, health, and education. This shift towards productive spending is likely to enhance long-term economic productivity and growth potential.

4.4 Constructive Impact on Credit Metrics

India’s fiscal deficit has been a point of concern historically. How all government’s in the past as well have been committed to fiscal consolidation. Though I will say that the deficit has maintained its status quo since the last 45 years. Not much has improved.

The fiscal deficit has declined from 9.2% of GDP in FY21 to 6.4% in FY23.

Effective management of the fiscal deficit is essential for reducing the overall debt burden and maintaining fiscal discipline.

India’s debt-to-GDP ratio remains high. It peaked at 89.45% in 2020-2021 due to pandemic-related expenditures. Efforts to stabilize and reduce this ratio are critical. A lower debt-to-GDP ratio will enhance India’s fiscal sustainability and reduce the risks associated with high debt levels.

Point #5: Critical Analysis

S&P’s optimistic outlook is well-founded, given India’s impressive economic recovery post-pandemic. The government spending towards infrastructure is a positive sign for the economy. But along with this increasing expenditure, fiscal consolidation is also necessary.

The focus on capital expenditure is a prudent move, as it enhances productivity and supports sustainable growth. Additionally, the positive sentiment surrounding India’s policy continuity, irrespective of political outcomes, reinforces investor confidence.

There are a few challenges that need to be addressed. The high fiscal deficit and substantial debt burden remain areas of concern.

In comparison to other emerging markets, India’s economic performance is better. Countries like China have leveraged their manufacturing capabilities and export-led growth models effectively. India is still in the process of building its manufacturing base and enhancing export competitiveness.

Point #6: Achieving a Higher Credit Rating: What India Needs to Do

I think, India has never been rated higher than ‘BBB-‘ by S&P.

The ‘BBB-‘ rating has been India’s long-standing rating. It reflects the country’s potential and challenges. Achieving a higher rating would be a significant milestone.

To achieve a higher credit rating than ‘BBB-‘, India must address several key areas to enhance its economic stability, fiscal health, and policy environment.

Here are the specific actions that India can take to improve its credit rating:

6.1 Fiscal Consolidation and Debt Reduction

India needs to reduce its fiscal deficit. Sustained efforts to limit the fiscal deficit to manageable levels (ideally below 3% of GDP) are crucial. This involves both increasing revenues and rationalising expenditures.

Reducing the debt-to-GDP ratio is crucial for economic stability.

  • It can be achieved by fostering higher economic growth, which increases the GDP base, thereby reducing the ratio.
  • Prudent fiscal management involves controlling public spending and enhancing revenue collection to avoid excessive deficits.
  • Effective debt management strategies include refinancing high-cost debt at lower rates and extending debt maturities.

Together, these measures improve the fiscal health of the country.

6.2 Enhancing Economic Growth

Improving the investment climate by simplifying regulations can be a good step for India. Ensuring policy stability, and addressing bottlenecks can attract more private investment, both domestic and foreign.

Continued investment in infrastructure, particularly in transport, energy, and digital connectivity, is vital. It will enhance productivity of assets supporting long-term growth.

6.3 Structural Reforms

Implementing labor market reforms to make the workforce more flexible and competitive is necessary. This includes simplifying labor laws and improving labor market efficiency.

Strengthening the financial sector by addressing non-performing assets (NPAs) is an essential first. On other side, improving access to credit for small and medium enterprises (SMEs) can support economic growth. Creating a balance between NPA and credit availability is most crucial. This calls for a more prudent regulations from the government side and also from the financial institutions.

Moreover, improving the ease of doing business through regulatory reforms and reducing bureaucratic red tape will help. Enhancing legal frameworks for business operations is essential for fostering a business-friendly environment.

6.4 Policy Continuity and Governance

Ensuring policy continuity and predictability, regardless of political changes, is essential for maintaining investor confidence and economic stability.

Enhancing governance standards by reducing corruption is also a key. Improving public sector efficiency can strengthen institutional quality and economic management.

6.5 External Sector Resilience

Maintaining a healthy balance of payments position will ensure that a country can meet its international financial obligations. Adequate foreign exchange reserves provide a buffer against external shocks. It allows the country to manage fluctuations in currency and global markets.

Prudent management of external debt ensures that the country does not become over-leveraged and can meet its debt repayments without strain.

Together, these measures enhance economic resilience.

Diversifying the export base and enhancing competitiveness in global markets can reduce vulnerability to external demand fluctuations.

India’s path to achieving a higher credit rating involves a combination of factors as explained above.

Final Words

Despite India’s status as one of the world’s largest and fastest-growing economies, its credit rating remains at BBB-. India historically never earned a better rating than this. High fiscal deficits and high debt-to-GDP ratio is the main reason for this limit. Moreover, India is also marred with income inequality, unemployment, and poverty. Since 1947 (Independence), the situation has these three parameters have improved but the challenge has also swelled (the population).

The Timing of the Rating Release

S&P Global released India’s rating just before the general elections’ results on 04-June-2024. This timing can be seen from several perspectives:

  1. Publishing before the election results demonstrates S&P’s confidence in the structural reforms and economic policies regardless of the election outcome. May be the agency was trying to suggest that economic fundamentals are expected to remain stable.
  2. The timing underscores the importance of policy continuity in maintaining and improving economic conditions.

I was thinking, whether upgrading the rating outlook from ‘stable’ to ‘positive’ is useful for India or not? It can be useful in the following ways:

  1. Investor Confidence: A positive outlook signals potential for future upgrades. It can boost investor confidence and potentially leading to increased foreign investment.
  2. Lower Borrowing Costs: It can help lower the cost of borrowing for the government.
  3. Economic Credibility: It will also marginally enhances the country’s economic credibility on the global stage.

While India’s BBB- rating reflects ongoing challenges, the positive outlook upgrade and its timing emphasise confidence in India’s economic fundamentals and policy continuity.

This small improvement, although timed before elections, serves as a strategic reassurance to markets and investors about India’s growth prospects and commitment to reforms.

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