S&P maintains sovereign rating at ‘BBB – ’

By Angel Broking | Published on 15th July 2021 | 18

S&P maintains sovereign rating at ‘BBB - ’

S&P Global Ratings have retained India’s sovereign rating to BBB-, but with a stable outlook. The US-based credit rating agency mentions that, even though growth risks are rising, India’s economy and fiscal position will start to recover from the current financial year onwards.

S&P forecasts the real GDP growth to rebound to 9.5%.

S&P’s affirmation comes as a relief

Announcing this rating, an S&P executive mentions that they have assigned a stable outlook in line with an expectation that the Indian economy will recover from this pandemic and maintain a sound net external position.

The reports from S&P brought a semblance of relief as they present a more positive outlook. Commenting on this scenario, S&P acknowledged the risks to India’s growth rates in the long term.

However, they are hopeful about the economic reforms put in motion by the Government. They believe, if executed well, these reforms can keep India’s growth rate stable and in a better position than its peers.

Furthermore, they also acknowledged that the economic hit from Covid-19 had shaken the country’s fiscal settings, which need major repairing to get back on track. Thus, they expect a marginally higher fiscal deficit for this financial year. Nonetheless, they expect a consolidation of the same in the next 2 to 3 years.

The path ahead

S&P predicts India’s fiscal deficit to touch 11% of GDP in the current financial year due to pandemic-related spending. At the same time, it also issued a warning that the pressure of India’s sovereign rating could increase in the next couple of years if it fails to find a strong recovery from this deficit.

On the upside, S&P will increase India’s rating once the Government curtails fiscal deficits successfully. Even though it is not an overnight job, in the next few years, S&P predicts a strong recovery of India’s economy.

Standard and Poor expects the Indian economy to recover strongly from the second half of FY2022 and in the following years. It believes that the stabilisation of India’s credit profile is in the cards. Parried with India’s limited external indebtedness, the economy will revive.

Role of Union Budget 2021

The budget announcement came at a time when India was recovering from its first wave of Covid-19. To counter this economic contraction, a 34% boost in capital expenditure was announced along with comprehensive reforms to boost the economy.

A robust expenditure programme like this may help the economy to heal faster, but it will further weaken its finances. This will impose a new challenge for the Government, wherein maintaining a balance will be key.

This decision will get more complicated if the economy does not meet its estimated recovery marks. Hence, quick and proper implementation of economic reforms holds heft in this respect to get India’s economic development back on track and secure better ratings across the board.

Parting thoughts

As multiple reports have already indicated, this is has been one of the worst contractions of the Indian economy in recent times. Therefore, expecting a swift recovery is a big ask, and frankly, a bit over ambitious as well.

A sovereign credit rating like this reflects an economy’s real GDP growth, and for India, it has been above average. However, before jumping to any conclusion, it will do well to remember that this country is going through a second wave of Covid that has halted economic activities once again.

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Frequently Asked Questions

What is a sovereign rating?

It is an independent assessment of creditworthiness for countries or any other sovereign entities. It offers an insight into the risk allied with investing in the debt of such sovereign entities, including political risks.

What is the total capital expenditure for FY2021-22?

Total capital expenditure for the financial year of 2021-22 stands at Rs.5.54 lakh crore.

What is the current highest FDI threshold for insurance sector?

The current highest FDI threshold for insurance sector remains at 74%.