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Informist, Thursday, Aug. 27, 2026

 

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--S&P affirms India at 'BBB' 
--S&P affirms India at 'BBB', outlook stable 
--S&P: Policy stability to support India's long-term growth prospects 
--S&P: High infra investment to support India's long-term growth prospects 
--S&P: Stable fisc, monetary policy to underpin India rtg over next 24 mos 
--S&P:Stable India fisc, monetary policies moderate high debt, interest burden 
--S&P:May cut India rtg if political committment to fisc consolidation fades 
--S&P:May cut rtg if structurally slow growth undermines fisc sustainability 
--S&P: May raise India rtg if fiscal deficit narrows meaningfully 
--S&P: May up India rtg if general govt debt net change less than 6% of GDP 
--S&P: Sustained rise in public capex would alleviate weak India finances 
--S&P:India rtg anchored by fast-growing econ, strong external balance sheet 
--S&P:India rtg weighed by govt's weak fisc performance, burdensome debt stock 
--S&P: India rtg weighed by low GDP per capita 
--S&P: See India FY27 GDP growth at 6.6% on energy shock, agri conditions 
--S&P: Expect India's strong growth dynamics to continue in medium term 
--S&P: See India GDP growth averaging 7.0% YoY over next 3 years 
--S&P:Strong growth to moderate debt-to-GDP ratio despite wide fisc deficits 
--S&P: India rural econ to be affected by El Nino, Middle East war 
--S&P: India econ diversification to cushion the effect of weak monsoons 
--S&P: India fisc settings are weakest part of its sovereign ratings profile 
--S&P: India govt can depict gradual, concrete path to fiscal consolidation 
--S&P: India econ recovery now on track 
--S&P: India FY27 Union Budget reinforces view of gradual fisc consolidation 
--S&P: See India general govt fisc deficit at 7.3% of GDP FY27 
--S&P: See India general govt fisc deficit to fall to 6.6% of GDP by FY30 
--S&P: Excise duty cut on fuel to weigh marginally on India fisc gap FY27 
--S&P: Higher fertiliser subsidy  to weigh marginally on India fisc gap FY27

 

NEW DELHI – S&P Global Ratings Thursday affirmed India's long-term sovereign credit rating at "BBB" with a "stable" outlook, reflecting the rating agency's expectation that policy stability and high infrastructure investment will support the country's growth prospects. S&P also affirmed India's short-term sovereign ratings at "A-2". "We anticipate solid consumer and public investment dynamics to propel real GDP growth to average 7.0% over the next three fiscal years," the agency said. "These growth rates place India substantially above sovereign peers at similar income levels and should continue to underpin fiscal revenue increase."

 

The rating agency, however, remained unimpressed with India's weak fiscal metrics, an improvement of which can help the country secure a higher rating, something other rating agencies have also pointed out. "India's fiscal settings have been the weakest part of its sovereign ratings profile," S&P said. Strong economic growth along with stable fiscal and monetary policies that moderate the government's elevated debt and interest burden will underpin the rating over the next 24 months, it added.

 

"The sovereign credit ratings on India are anchored by a dynamic and fast-growing economy, strong external balance sheet, and stable institutions that support policy predictability," the rating agency said. "Counterbalancing these strengths are the government's weak fiscal performance and burdensome debt stock, as well as low GDP per capita."

 

S&P had in August 2025 raised India's long-term sovereign credit rating a notch to "BBB" from "BBB-", becoming the first major rating agency to do so. It had cited the Indian economy's resilience and sustained fiscal consolidation for the upgrade. The agency had cited the same reasoning when it upped its outlook on India's long-term rating to "positive" from "stable" in May 2024.

 

FISCAL SETTING

India's weak fiscal metrics and debt affordability have been a key hindrance to a rating upgrade. To woo rating agencies and keep its interest repayment in check, the Centre has adopted a new fiscal consolidation metric--debt-to-GDP ratio--moving away from tracking a particular level of fiscal deficit.

 

In the Budget for the financial year 2024-25 (Apr-Mar), Finance Minister Nirmala Sitharaman had announced that from FY27, the government would endeavour to "keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP". Consequently, in the Budget for FY27, the government estimated the debt-to-GDP ratio for the current fiscal year at 55.6% of GDP, 50 basis points lower than the estimate of 56.1% of GDP for FY26. As part of the rolling target, the government is looking to cut its debt-to-GDP ratio to 50%, plus or minus 100 bps, by March 2031.

 

Corresponding to the debt-to-GDP ratio for FY27, the government projected the fiscal deficit at 4.3% of GDP. The Union Budget had pegged the fiscal deficit for FY27 at 4.3% of GDP, or INR 16.96 trillion. The fiscal deficit target for FY27 will, however, be 4.5% of GDP, based on the downward revision in India's nominal GDP in the new series with FY23 as the base year.

 

According to S&P, although revenue collection has been strong in the last two financial years, a rise in government expenditure has partially offset the gains. Nevertheless, it expects the government to gradually pare down its sizeable deficits over the next few years. "While fiscal slippage may occur this year, the consolidation trajectory will continue with high general government deficits declining gradually," the agency noted. 

 

S&P also expects the impact of excise duty reduction on fuel, along with a potentially higher fertiliser subsidy bill, to weigh marginally on the fiscal deficit this year. "If measures to mitigate fuel price rises become structural, this will weaken the government's revenue base," it said in its report. "But we expect the higher tariff on refinery fuel exports to compensate for this to some extent."

 

Additionally, the rating agency does not expect the rationalisation of goods and services tax rates in September to impede the government's commitment to fiscal consolidation. "In our view, the shift to a two-slab system of 5% and 18%, removing the 12% and 28% rates, will push consumption and boost collection efficiency," it said. 

 

The rating agency noted that India differs from most regional and global peers in that its state governments also run persistently high deficits. "We anticipate the aggregate state shortfalls to be 2.7%-2.9% of GDP over the next three to four years," it said. "In combination with central government deficits that trend down to 3.9% of GDP by FY30, we project the general government fiscal deficit to gradually decrease to 6.6% of GDP." On a general government basis, S&P expects the fiscal deficit to be at 7.3% of GDP in FY27. "Although this remains high, the changes in net general government debt of 9%-13% of GDP seen in the pandemic years are behind," it added.

 

GROWTH PUSH

There are hopes of improvement in fiscal metrics, thanks to India's strong economic growth. "India's favourable GDP growth to interest rate differential has kept government borrowing sustainable, and we expect this to continue," S&P said. "We project the ratio of net general government debt to GDP to decline to 79.3% by FY30, from 85.4% in FY25," it said, adding that this takes India closer to its pre-pandemic debt levels and well below the pandemic peak of 93.3% of GDP.

 

The agency projected India's GDP growth to fall to 6.6% in FY27 on account of the continuing energy shock and challenging agricultural conditions. But it expects India's strong growth dynamics to continue in the medium term, with GDP growth averaging 7.0% annually over the next three years. "These growth rates place India substantially above sovereign peers at similar income levels and should continue to underpin fiscal revenue increase," it said. "This has a moderating effect on the ratio of government debt to GDP despite wide fiscal deficits."

 

S&P's GDP growth projection for FY27 is 10 basis points lower than the Reserve Bank of India's latest projection of 6.7%.

 

Higher capital expenditure by the Centre and states will spur investments and contribute to growth, while finalising the India–US bilateral trade agreement will reduce uncertainty and enhance investor confidence, according to the report. "We recognise, however, that India's high growth rates need to be sustained over a long period for the economy to create sufficient jobs, reduce inequality, and reap the full benefit of its favourable demographics," S&P said.

 

From a public policy level, S&P noted that the Bharatiya Janata Party-led coalition government's healthy majority in the Lok Sabha is important as it supports the government's efforts to implement economic reforms. "In our view, the success of the government in funding large infrastructure investment without substantially widening the country's current account deficit will be important," it said. "If India can shrink the fiscal deficit significantly while achieving these objectives, rating support will strengthen over time." 

 

The Narendra Modi government has been pushing capital expenditure to drive economic growth. In the past six years, the government has increased the Centre's capital expenditure by more than three times. It has projected capital expenditure for FY27 at INR 12.22 trillion. S&P sees bottlenecks in executing infrastructure projects easing as supply chain pressures reduce. "More effective capex programs, including greater participation by the private sector, will help to alleviate a widespread shortfall in physical infrastructure and, over time, enhance the productive capacity of the economy," it said.

 

Regarding private-sector participation, S&P said Indian banks have been important participants in financing the government's deficits due to investing in government bonds. "But their elevated exposure may also indicate a diminished capacity to lend more to the government, without crowding out private sector borrowing," it said in its report. 

 

EXTERNAL SECTOR

According to S&P, India's strong external position is a key factor in its credit profile. The country retains a modest net external asset position, it said. Current account deficits are likely to remain small over the next few years while domestic demand stabilises and the weaker rupee boosts competitiveness, it added.

 

That said, volatile commodity prices remain a risk to current account projections, with heightened risks due to the West Asia war and volatile energy prices. In the first quarter of FY27, India's current account recorded a deficit of $3.1 billion, compared with a deficit of $2.9 billion in the corresponding period last year. This was primarily due to a sharp increase in the merchandise trade deficit to $85.7 billion in the quarter from $68.9 billion.

 

"Augmenting the external assessment is our view of the Indian rupee as an actively traded currency because it accounts for more than 1% of global foreign exchange market turnover, indicating its depth in global foreign exchange markets," S&P said. "The government's limited external debt also moderates currency and capital flight risk, in our opinion," it added. "We project the net external financial assets that India's public and financial sectors hold will average 7.8% of current account payments through FY30."

 

The rupee came under pressure from a surge in crude oil prices and strong foreign capital outflows following the outbreak of war in West Asia at the end of February. During Jan-May, foreign portfolio investors pulled out $24.67 billion from Indian markets, more than triple the $7.6 billion withdrawn in the corresponding period a year ago. Thursday, the Indian currency ended at 95.54 to a dollar.

 

S&P's report also said that monetary policy reform to switch to inflation targeting has reaped dividends as inflationary expectations are better anchored than they were a decade ago. Despite inflation rising in the past few months, driven by food inflation and high energy prices, it has stayed within the RBI's target range of 2-6% and is expected to remain so over the next 3-4 years, the rating agency said.

 

India's relatively deep domestic capital markets support its monetary policy credibility, the agency also said. "This ensures the effective transmission of policy decisions to the real economy and provides the government with sufficient access to funding."

 

The RBI projects FY27 headline inflation at 5.0% and though inflation is likely to be higher in the near term, the RBI's Monetary Policy Committee has left the policy repo rate unchanged at 5.25% in a unanimous decision, while retaining the "neutral" policy stance. 

 

RATING DRIVERS

S&P outlined both upside and downside scenarios for further rating changes. The agency said it may downgrade India's rating if there is an erosion of political commitment to consolidate public finances. In addition, downward pressure could come from India's economic growth slowing materially on a structural basis such that it undermines fiscal sustainability. 

 

On the other hand, India may be in line for a positive rating action or an upgrade if fiscal deficits narrow meaningfully so that the general government fiscal deficit falls below 6% of GDP on a structural basis. The protracted rise in public investment in infrastructure will lift the economic growth dynamism that, combined with fiscal adjustments, would alleviate India's weak public finances, S&P said.  End

 

Reported by Priyasmita Dutta

Edited by Rajeev Pai

 

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