India's Fiscal Prudence May Secure Sovereign Rating Upgrade in 24 Months

India could achieve a sovereign rating upgrade within the next 24 months if the central government successfully manages its finances and reduces the fiscal deficit to 4% of GDP. S&P Global Ratings emphasizes the importance of fiscal consolidation and notes India's strong economic potential.

India could secure a sovereign rating upgrade within the next 24 months, contingent upon prudent financial management by the central government and reducing the fiscal deficit to 4% of GDP, an S&P Global Ratings official stated on Wednesday.

S&P Global Ratings Director, Sovereign Ratings, YeeFarn Phua, indicated that a general government (Centre + states) deficit falling below 7% of GDP would trigger an upgrade, with significant efforts needed from the central government.

"Should the central government manage to bring the fiscal deficit down to 4% of GDP, a rating upgrade will be considered over the next 24 months," Phua noted.

The central government aims to reduce the fiscal deficit to 5.1% of GDP this fiscal year, down from 5.63% in 2023-24. By the fiscal consolidation roadmap, the deficit will be targeted to drop to 4.5% by 2025-26.

In May, the US-based rating agency upgraded India's outlook to positive from stable, maintaining the rating at 'BBB-'.

Phua highlighted India's average growth rate of 8% over the past three years, driven by domestic consumption and infrastructure investments, which have had tangible effects.

"We foresee India's medium-term growth potential at 7%," Phua said. Removing infrastructure bottlenecks could lead to 8% growth without risking economic overheating, he added.

S&P projects India's economic growth at 6.8% for the current fiscal, down from 8.2% last fiscal.

S&P Global Ratings Chief Economist, Asia-Pacific, Louis Kuijs, remarked that India is the fastest growing economy in Asia. Covid's impact on Asian economies appears to be receding, and growth is on an upward trajectory.

"We observed that Covid significantly affected growth trajectories, especially in countries like India. However, India is recovering lost ground and expanding at a faster pace than we anticipated four years ago," Kuijs said.

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