S&P Global upgrades India to 'BBB' on economic resilience, sustained fiscal consolidation

S&P Global Ratings raised its long-term sovereign credit ratings on India to ‘BBB’ from ‘BBB-’, and its short-term ratings to ‘A-2’ from ‘A-3’ on Thursday. The outlook on the long-term rating is stable and the impact of US tariffs on the Indian economy will remain “manageable,” the ratings agency said.

The ratings upgrade comes in the backdrop of continued policy stability, high infrastructure investment and long-term growth prospects.

“The stable outlook reflects our view that continued policy stability and high infrastructure investment will support India's long-term growth prospects. That along with cautious fiscal and monetary policy that moderates the government's elevated debt and interest burden will underpin the rating over the next 24 months,” S&P Global Ratings said in its note. 

“The upgrade of India reflects its buoyant economic growth, against the backdrop of an enhanced monetary policy environment that anchors inflationary expectations,” the agency added.

“Together with the government's commitment to fiscal consolidation and efforts to improve spending quality, we believe these factors have coalesced to benefit credit metrics,” it added.

The agency pointed out that India remains among the best performing economies in the world and expects the growth to continue. “It staged a remarkable comeback from the pandemic with real GDP growth over FY 2022 (year-end March 31) to FY 2024 averaging 8.8%, the highest in Asia-Pacific,” it said.

“We expect these growth dynamics to continue in the medium term, with GDP increasing 6.8% annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits,” it added.

Commenting on the U.S. tariffs, the agency said the impact will be manageable. “We believe the effect of U.S. tariffs on the Indian economy will be manageable. India is relatively less reliant on trade and about 60% of its economic growth stems from domestic consumption,” it said.

“We expect that in the event India has to switch from importing Russian crude oil, the fiscal cost, if fully borne by the government, will be modest given the narrow price differential between Russian crude and current international benchmarks,” it added.

The agency expects that with economic recovery, the government can depict a “more concrete (albeit gradual) path” to fiscal consolidation. “Our projections indicate a general government deficit of 7.3% of GDP in fiscal 2026 to decline to 6.6% by fiscal 2029,” it said.

The agency noted that India's quality of public spending has improved in the last five to six years.

“The current administration has increasingly shifted budget allocation to infrastructure spending. Capital expenditure (capex) of the union government is scheduled to increase to ₹11.2 trillion, or about 3.1% of GDP in fiscal 2026. This is up from the 2% of GDP from a decade before. Adding capital spending by states, total public investment in infrastructure is estimated at around 5.5% of GDP, which is on par or higher than sovereign peers,” it said.

“We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth,” the agency added.

On monetary policy, the agency said reform to switch to inflation targeting has reaped dividends. “Inflationary expectations are better anchored than they were a decade ago. Between 2008 and 2014, India's inflation reached double-digits on numerous occasions. In the past three years, despite volatility in global energy prices and supply-side shocks, CPI growth averaged 5.5%,” it said.

“In recent months, it stayed at the lower bound of the Reserve Bank of India's (RBI) target range of 2%-6%. These developments, coupled with a deep domestic capital market, reflect a more stable and supportive environment for monetary settings,” it added.