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S&P Global's recent upgrade of India's credit rating is a significant vote of confidence in the country's economic trajectory. The upgrade, the first in nearly two decades, moves India from BBB- to BBB with a stable outlook, effectively dismissing previous skepticism, particularly from figures like former United States President Donald Trump, who had labeled India a 'dead economy'. This upward revision reflects a recognition of India's robust economic performance, particularly its impressive average real GDP growth of 8.8% from FY22 to FY24. This growth rate is especially noteworthy considering the challenging global economic environment, characterized by monetary uncertainty following the Covid-19 pandemic and significant geopolitical headwinds stemming from conflicts in Ukraine and West Asia. The fact that India has managed to achieve the highest growth rate in the Asia-Pacific region during this period speaks volumes about the resilience and dynamism of its economy. Several factors have contributed to this positive assessment. S&P's decision was preceded by a revision to 'positive' in May 2024, driven by the same robust growth and improved quality of government spending. This highlights the importance of both the quantity and quality of economic activity. It's not just about generating higher GDP figures; it's also about ensuring that government resources are allocated effectively and efficiently to support sustainable and inclusive growth. The rating upgrade also reflects the Indian government's ongoing commitment to fiscal consolidation, which refers to its efforts to reduce the country's overall debt burden. Fiscal consolidation is crucial for maintaining macroeconomic stability and fostering investor confidence. By managing its finances prudently, the government can create a more predictable and stable economic environment, which in turn attracts both domestic and foreign investment. This investment is essential for driving further economic growth and creating jobs. The benefits of fiscal consolidation are manifold. It helps to ensure sustainable revenue streams and reduces unnecessary expenses. This prudent financial management not only boosts investor confidence but also mitigates the risk of an overall debt crisis, a situation that some developed economies, like the United States, have grappled with. Therefore, the commitment to fiscal discipline is a key factor in S&P's positive assessment of India's economic prospects.
While the upgrade is undoubtedly positive news, S&P has also cautioned that certain risks could undermine India's economic progress. These risks include a weakening of political commitment to fiscal consolidation and a structural slowdown in economic growth that could jeopardize debt sustainability. Therefore, it is crucial that the government remains steadfast in its commitment to fiscal discipline and continues to implement policies that promote sustainable and inclusive growth. Achieving this requires a multi-pronged approach. First, the government must continue to focus on improving the quality of government spending. This means ensuring that resources are allocated efficiently and effectively to areas that have the greatest potential to generate long-term economic benefits, such as infrastructure development, education, and healthcare. Second, the government needs to work on reducing subsidies, which can be a drain on public finances and distort market signals. While subsidies can play a role in supporting vulnerable populations, they should be targeted and designed in a way that minimizes their negative impact on the economy. Third, the government needs to continue to improve monetary policy and manage inflation effectively. Stable prices are essential for maintaining macroeconomic stability and fostering investor confidence. As S&P Global Ratings Director YeeFam Phua pointed out, India's rating could climb even higher if fiscal deficits narrow meaningfully, such that the net change in general government debt falls below 6% of GDP on a structural basis. This provides a clear target for the government to aim for and underscores the importance of continued fiscal discipline. Finance Minister Nirmala Sitharaman's indication that the fiscal deficit would be cut from 4.8% of GDP in FY25 to 4.4% in FY26 is a positive step in this direction. The target for FY25 had been previously set at 4.9% of GDP, indicating a commitment to accelerating the pace of fiscal consolidation.
The article also addresses the potential impact of former US President Donald Trump's imposition of a 50% duty on Indian imports. While the tariffs have generated considerable debate, S&P believes that their impact on India's economic growth will be minimal. This is largely because India is not a heavily trade-oriented economy, and its exposure to the US in terms of exports to GDP is relatively small, approximately 2%. Chief Economic Advisor V Anantha Nageswaran has also stated that the impact of the tariffs will likely dissipate over the next one or two quarters. However, S&P does acknowledge that the shift away from Russian crude oil, as demanded by Trump, could have a modest impact on the government's finances, given the narrow price differential between Russian crude and current international benchmarks. This highlights the importance of diversifying India's energy sources and reducing its dependence on any single supplier. The government's positive response to S&P's upgrade underscores its commitment to maintaining a stable and predictable economic environment. The Finance Ministry stated that India has prioritized fiscal consolidation while maintaining its strong infrastructure creation drive and inclusive growth approach, which has led to the upgrade. The government also reiterated its commitment to undertaking further reforms to attain 'Viksit Bharat' by 2047. In conclusion, S&P's upgrade of India's credit rating is a significant achievement that reflects the country's strong economic performance and its commitment to fiscal discipline. While challenges remain, the upgrade provides a solid foundation for further economic growth and development. Continued focus on fiscal consolidation, improved government spending, and effective monetary policy will be essential for maintaining the rating and achieving the government's long-term economic goals. The upgrade signals to investors worldwide that India is a stable and attractive destination for investment, which should further boost economic growth and create opportunities for its citizens. The factors that underpin S&P's rating are based on institutional, economic, external, financial, and monetary considerations, indicating the comprehensive nature of the agency's assessment. The article emphasizes that the 'BBB' rating means India has an 'adequate capacity to meet financial commitments, but is more subject to adverse economic conditions,' meaning continued vigilance is necessary.
Source: 'We May Raise Further If...': Global Ratings Agency's Big Note To India