S&P will monitor government policies for the next two years before calling for an upgrade in India’s credit rating

On Friday, S&P Global Ratings said it would monitor fiscal data for the next 1-2 years, beyond the new government’s pro-growth policies, before deciding to upgrade India’s sovereign rating.

S&P, which earlier this week raised India’s outlook to positive while maintaining its sovereign rating at BBB-, expects the new government to continue its pro-growth policies, infrastructure investments and commitment to fiscal consolidation.

“Over the next 2 years, we will closely monitor whether the fiscal consolidation path presented by the government will continue… Over the next 1-2 years, we will observe how these fiscal data evolve, and if so, it will lead to an upgrade in the rating,” he said. S&P Global Ratings analyst YeeFarn Phua during the webinar.

BBB- is the lowest investment rating.

According to the consolidation plan, the budget deficit, which is the difference between government expenditure and revenues, will decrease to 4.5% by March 2026. GDP from an estimated 5.1 percent. at the end of March 2025

Phua said that once the impact of high infrastructure investment is realized and bottlenecks are removed, India’s long-term growth potential could be 8%.

He said India has enjoyed consistently high GDP growth rates since economic liberalization in 1991, despite being ruled by different parties and coalitions.

“This reflects national consensus on key economic policies. We believe that this pro-growth policy will continue after the elections and the political commitment to fiscal consolidation will continue in the coming years. Regardless of who the new government will be, pro-growth policies, sustained investments in infrastructure, striving to reduce the budget deficit – these things have brought very good results and we believe that this will continue to be the case in the coming years, regardless of who is in power,” he said.

The results of the ongoing Lok Sabha elections will be announced on June 4.

Phua said he expected the general government deficit (Centre + States) to narrow to 6.8% of GDP by 2028 from the current 7.9%.

S&P director (Asia-Pacific sovereign ratings) Andrew Wood said India’s fiscal performance remains relatively weak compared to some other emerging market countries. The fiscal deficit of BBB-rated countries – Malaysia, the Philippines, Indonesia, Thailand, Vietnam – would be below 4% this year, compared with 7.9% for India.

However, in deciding India’s sovereign rating, S&P also took into account the change in government net debt, as well as dynamics such as the health of the economy, related growth prospects, the attractiveness of government-sold debt and the ability to finance deficits.

“We have seen India perform very well in terms of economic growth in recent years and we expect this to continue to perform very well in the near future. The quality of India’s spending program has improved significantly over the last few years, which gives us greater confidence that economic growth will remain strong in the future,” Wood said.

While S&P views India’s fiscal deficit as high, it also expects there will be more room for improvement in the future, which will be reflected in the rating, Wood added.

On growth prospects, Mr. Phua said S&P expects India’s economy to grow at 6.8% this fiscal year, but expects growth at around 7% over the next 2-3 years.

“We expect India’s medium-term growth potential to be around 7%… Once infrastructure investments are completed and connectivity improves, India’s growth of 8% in the long run is quite possible,” he said.

The above average growth has given India a better economic rating compared to other countries with similar income levels, Phua said, adding that S&P believes that growth prospects remain strong and India’s growth is sustainable at 7%.