India must lower fiscal deficit ‘a lot more’ to get a higher rating, says S&P

India needs to lower its fiscal deficit “a lot more” if it wants to get an upgrade, according to S&P Global Ratings.

“The starting point of India’s fiscal performance has been very, very weak. And, even after the improvements that we have seen recently, the fact is it remains a very weak fiscal performance compared to the metrics that we are assessing it against,” Kim Eng Tan, S&P managing director for APAC sovereign ratings, said late on December 14.

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“As a result, unless we see significantly more fiscal consolidation and bringing deficits down a lot more than what we have seen recently, we are unlikely to see further upside pressures on the rating,” he said.

S&P has a ‘BBB-‘ rating on India with a stable outlook.

S&P’s assessment is shared by other global rating agencies, with Moody’s Investors Service also requiring a fiscal deficit “much narrower” than 4.5 percent of GDP for it to reconsider its view on India’s fiscal strength.

The Indian government is targeting a fiscal deficit of 5.9 percent of GDP for the current financial year on its way to cutting it to 4.5 percent by 2025-26. However, the Union finance ministry has so far not offered clarity on what its plans are for beyond 2025-26, with the original fiscal deficit target of 3 percent having been put on hold due to the Covid-19 pandemic.

Also read: Moving the goalposts — fiscal deficit target and a 20-year delay

At the state level, ratings agencies such as S&P consider the central plus state combined debt and deficit indicators. The fiscal deficit of Indian states is expected to rise to 3.1 percent of GDP in 2023-24 from 2.8 percent in 2022-23.

While the fiscal metrics are a weakness, the GDP has increased smartly, with Kim Eng Tan saying that the “Indian growth story is not going to end this year”. S&P expects India’s GDP to grow by 6.4 percent in 2023-24 and by at least as much for the next few years.

“However, we have already given India full credit for its economic growth and its other strengths, including relatively deep domestic bond market, its monetary credibility, and its external balance sheet. Where India can potentially see an upgrade in its credit ratings is improvement on fiscal front,” Tan added.