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Informist, Tuesday, Aug. 19, 2025

 

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--S&P: Various factors over past decade, not one-off, led to India rtg upgrade 
--CONTEXT: Comments by S&P Global Ratings analysts in a webinar 
--S&P: India's robust growth having constructive impact on its credit metrics 
--S&P: India govt debt burden to remain high in coming years 
--S&P: India's interest service burden remains onerous 
--S&P: Expect India's interest service burden to gradually decline 
--S&P: India's focus on infra spending to lead to higher growth trajectory 
--S&P: India's focus on infra spending to remove bottlenecks 
--S&P: Lower econ risks, India rtg upgrade to benefit financial institutions 
--S&P: Actual exposure of Indian goods to US tariffs low 
--S&P: Don't see major impact of US tariffs on India's growth in long term 
--S&P: Proposed 2-slab GST system could boost India fisc revenue in long term 
--S&P: Don't see proposed 2-slab GST to be major drag on Indian govt revenue 
--S&P: RIL's rating could be upgraded over next 12 months 
--S&P: Expect capex to pick up in India in coming years 
--S&P: Expect inflation to remain contained in India 
--S&P: See some scope for additional monetary policy easing in India 
--S&P: Uncertainty over US tariffs biggest risk to India's growth right now

 

NEW DELHI – The Indian government's revenues are unlikely to see a major hit from the upcoming overhaul of the goods and services tax system, where four rate slabs are proposed to be merged into two, S&P Global Ratings said Tuesday. Instead, if the proposed rate rationalisation is completed, it could boost the government's revenue in the long run, the rating agency said.

 

Prime Minister Narendra Modi in his Independence Day speech announced that GST reforms will take place by Diwali. The Centre has proposed a two-slab GST structure with 5% and 18% rates in its recommendations to a group of ministers constituted by the GST Council, Informist reported Friday. Currently, there are four broad rate slabs, including 12% and 28%. 

 

"Of course, the first thought is that rates will come down and that could impact fiscal revenue, but it might not necessarily be so," Yee Farn Phua, director, sovereign and international public finance ratings, S&P, said. "If you look at the current GST regime, it is actually quite a complex one. With the proposed two-rate system being looked at, though the effective rate could be somewhat lower, but easier implementation and clearer accounting processes could actually be a boost to fiscal revenue over the longer term," the analyst said at a webinar after S&P last week upgraded India's sovereign rating to 'BBB' from 'BBB-'.

 

The government's push for a simpler GST regime increased concerns over the central government's fiscal management. Phua said the government is unlikely to reform the GST regime to the point that it will hit its fiscal revenues. The proposed GST overhaul will also take time as the matter is yet to go to GST Council. "But overall, we don't think it will be a major drag on fiscal revenue," Phua said. Once the lower tax rates are implemented, it could help boost consumption spending in India, including in the short term, S&P said. 

 

S&P said India's weak fiscal metrics remain the most vulnerable part of its ratings profile, even after the sharp fiscal consolidation since the COVID-19 pandemic. The government lowered the fiscal deficit to 4.8% in 2024-25 (Apr-Mar) from 9.2% in FY21, and aims to reduce it to 4.4% of GDP this year.

 

This was one of the factors which led to S&P upgrading India's sovereign rating, analysts at the rating agency said. "It's not just any single factor or any specific event that's driving this upgrade, but rather it is our observation of the resilience of the Indian economy in the past decade or so and also of the strength of the government's overall policymaking," Phua said. 

 

S&P said it upgraded India's rating because of robust economic expansion that is benefitting credit metrics, government's political commitment to deliver sustainable public finances, marked improvement in quality of government spending, and the credibility of monetary policy regime in managing inflation.

 

According to S&P, India's economic recovery is "well on track", and the government can pursue a concrete and gradual path to fiscal consolidation. Government's debt burden will continue to remain high in the coming years, higher than the pre-pandemic level, but well below the pandemic peak, S&P said.

 

S&P expects the general government fiscal deficit to fall to 6.6% of GDP by FY29 from 7.3% in FY26. The consolidation will be led by the Centre, with states likely to maintain a steady deficit of 2.7% of GDP in the forecast timeline, the rating agency had said its rating assessment report last week.

 

Indian government's interest service burden also remains onerous, S&P said. The government's expenditure on servicing interest is expected to decline gradually because of strong revenue growth and cheaper funding costs for the government on the back of a better monetary policy environment, the rating agency said. 

 

Along with fiscal consolidation, the government's higher allocations to capital expenditure have improved the quality of government spending over the past few years, which aided the rating upgrade. The Centre aims to spend INR 11.2 trillion, or about 3.1% of GDP, on capital investments in FY26 and this continuous spending on infrastructure creation will ease bottlenecks to put the country on a higher growth trajectory, S&P said. The rating agency also expects capital investment by private sector to pick up in India in coming years.

 

The rating agency forecast India's GDP growth at 6.5% in FY26, which compares favourably with emerging market peers amid a broad global slowdown. "Solid consumer and public investment dynamics will propel real GDP growth. Growth momentum over medium term will be underpinned by the sound economic fundamentals," S&P said. 

 

The biggest risk to India's growth comes from the uncertainty over US tariffs, with Washington having imposed a 25% levy on imports from India and which is scheduled to rise to 50% from Aug. 27. S&P said it does not see a major impact on India's growth from the US tariffs over the long run, even though there might be a marginal hit in the short term.

 

"There's quite a few sectoral exemptions on things such as pharmaceutical products and also consumer electronics. So once you factor all that in, if you look at the actual exposure of India to the US in terms of exports, it's only about 1% of India's GDP," Phua said. "So even though the tariff rate at the moment now remains high, but we don't think it will have an overall impact on India's long-term economic growth prospects."

 

Reduced economic risks and upgrade to India's sovereign rating will benefit financial institutions, S&P said. After raising India's rating on Thursday, S&P upgraded credit ratings of several financial companies, including ICICI Bank, HDFC Bank, State Bank of India, Axis Bank, and Kotak Mahindra Bank.

 

Analysts at the rating agency said the rating of Reliance Industries Ltd. could be upgraded over next 12 months from the current 'BBB+'. Ratings of some other companies such as Bharti Airtel Ltd. will be driven by standalone credit profile improvements, and are not linked to the sovereign upgrade, S&P said. 

 

S&P expects CPI inflation to remain benign in India. "Overall, we expect inflation to remain relatively contained and there might be scope for additional monetary policy easing," Vishrut Rana, senior economist, Asia-Pacific at S&P said. "Not just on the food and energy side, but we also see core inflation being relatively well behaved in recent months and that is a sign of improving supply conditions in the economy," Rana said.  End

 

Reported by Shubham Rana

Edited by Vandana Hingorani

 

 

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