S&P maintains India at ‘BBB’; fiscal consolidation key to next rating move

S&P Global Ratings has affirmed India’s sovereign credit rating at ‘BBB’ with a stable outlook, citing the country’s strong growth dynamics, policy stability and robust external balance sheet, while cautioning that fiscal weakness remains the weakest part of its ratings profile.The ratings agency expects India’s economy to grow at an average 7% annually over the next three years, with strong growth helping moderate the government’s debt-to-GDP ratio despite still-wide fiscal deficits.S&P expects India’s GDP growth to slow to 6.6% in FY27, citing the impact of the energy shock and agricultural conditions. However, it expects the country’s strong medium-term growth dynamics to remain intact, with economic diversification helping cushion the impact of weaker monsoons and the West Asia war on the rural economy.The agency said policy stability and high infrastructure investment would support India’s long-term growth prospects. Stable fiscal and monetary policies are also expected to underpin the sovereign rating over the next 24 months, while helping moderate the impact of India’s high debt and interest burden.Fiscal consolidation, however, remains a key watchpoint. S&P said India’s fiscal settings are the weakest component of its sovereign rating profile and that a gradual, concrete path towards consolidation could strengthen the credit outlook.It expects the general government fiscal deficit to narrow to 7.3% of GDP in FY27 and further to 6.6% by FY30. The FY27 Union Budget, it said, reinforces its view that fiscal consolidation will proceed gradually.S&P could downgrade India if political commitment to fiscal consolidation fades or structurally slower growth undermines fiscal sustainability. Conversely, a meaningful narrowing of the fiscal deficit or a sustained decline in the annual change in general government debt to below 6% of GDP could support a rating upgrade.The agency also expects higher fertiliser subsidies and the fuel excise duty cut to weigh marginally on the FY27 fiscal gap. Sustained public capital expenditure, however, could help alleviate weaknesses in India’s public finances.

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