From stable to positive: S&P revises economic outlook
STORIES, ANALYSES, EXPERT VIEWS
A decade after upping India’s economic outlook from ‘negative’ to ‘stable’, S&P Global Ratings has raised it to ‘positive’ on the back of ‘robust economic growth, pronounced improvement in the quality of government spending and political commitment to fiscal consolidation’. This implies that India’s creditworthiness — a key factor for investors — has improved.
The Union Government has welcomed the revision in outlook, saying that it reflects a solid growth performance and good prospects for the coming years even as S&P expects continuity in economic reforms and fiscal policies — irrespective of the outcome of the General Election.
Remarkable recovery post Covid: The S&P has put its stamp on the remarkable recovery made by the Indian economy after the mayhem caused by the Covid-19 pandemic. It has forecast India’s GDP growth at 6.8 per cent this fiscal. This is an encouraging sign amid a global slowdown. Going a step ahead, the Reserve Bank of India (RBI) has estimated that the GDP growth is likely to touch 7 per cent in 2024-25. It was only last week that the RBI transferred a record Rs 2.1 lakh crore dividend to the government. The funds might be used to reduce the fiscal deficit, which the government hopes to bring down significantly over the next two years.
Assessment reflects broad continuity in economic reforms and fiscal policies: The revised outlook reflects its assessment that ‘policy stability, deepening economic reforms and high infrastructure investment’ will help sustain the Indian economy’s long-term growth prospects. The change in outlook comes only a few days before the results of the ongoing national elections are declared. While there are differences in the manifestos and public rhetoric of the two broad political formations contesting this election, which may well translate into differences in policies, the ratings agency says that ‘regardless of the election outcome’, 'broad continuity in economic reforms and fiscal policies’ can be expected.
Fiscal deficit and inflation under control: The change in outlook, according to The Indian Express “raises the possibility of a ratings upgrade over the next two years. The current rating of BBB — is the lowest investment grade rating. As per S&P, an upgrade hinges on two metrics: Bringing down general government debt, of Centre and states, to below 7 per cent of GDP and ensuring that inflation remains low. On both fronts, there has been improvement in recent years. The general government deficit, which had risen sharply during the pandemic year of 2020, has since declined. The Centre’s fiscal deficit has fallen from 9.2 per cent of GDP in 2020-21 to 5.8 per cent in 2023-24, and over the same period, the states’ deficit has fallen from 4.1 per cent to 3.1 per cent (budget estimate). As per the agency’s projections, the combined deficit is expected to fall from 7.9 per cent of GDP in fiscal 2025 to 6.8 per cent by fiscal 2028. Alongside, the general government debt is expected to fall to 81 per cent of GDP by fiscal 2028. Inflation, too, has been on a downward trajectory. As per the National Statistical Office’s most recent estimate, retail inflation had fallen to 4.83 per cent in April. A study from economists at RBI expects inflation to see a ‘durable alignment with the target’ in the second half of the year.”
Downside risks: However, there are downside risks. The ratings agency says that the outlook could be revised back to stable if there is an “erosion of political commitment” in ensuring that public finances remain sustainable. The next government must therefore continue on the path of fiscal consolidation, commit to bringing down the deficit below 4.5 per cent of GDP by 2025-26. It must also provide a fresh roadmap to lower the deficit further to 3 per cent. Alongside, it must ensure that the thrust on capital spending is sustained.” As S&P notes, it is ‘public investment and consumer momentum’ that will help sustain growth in the near term.
