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Why the upgrade?
S&P Global credited the stable outlook to continued policy stability and high infrastructure investment. It said that India is prioritizing fiscal consolidation, demonstrating the government’s political commitment to deliver sustainable public finances, while maintaining its strong infrastructure drive.
“Robust economic expansion is having a constructive effect on India’s credit metrics, and we expect sound economic fundamentals to underpin growth momentum over the next two to three years. In addition, monetary policy settings have become increasingly conducive to managing inflationary expectations,” it said.
These factors, it added, will underpin the rating over the next 24 months.
Further, the ratings agency said that India remains among the best performing economies in the world. While acknowledging that it staged a ‘remarkable comeback’ from the pandemic with real GDP growth over fiscal 2022 to fiscal 2024 averaging 8.8 per cent, S&P Global said, the growth dynamic is expected to continue with GDP increasing 6.8 per cent annually over the next three years.
Risks and opportunities
S&P Global said that it may lower the ratings if an erosion of political commitment to consolidate public finances is observed. In addition, downward pressure could also come from India’s economic growth slowing materially on a structural basis such that it undermines fiscal sustainability.
Furthermore, the ratings agency maintained that it may raise the ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6 per cent of GDP on a structural basis. “The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, would alleviate India’s weak public finances,” S&P Global said.
Impact of US tariff
S&P Global maintained that the effect of US tariffs on the Indian economy will be manageable with the nation being relatively less reliant on trade and about 60 per cent of its economic growth stemming from domestic consumption.
“We expect that in the event India has to switch from importing Russian crude oil, the fiscal cost, if fully borne by the government, will be modest given the narrow price differential between Russian crude and current international benchmarks,” it said.
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On August 6, US President Donald Trump signed an executive order imposing an additional 25 per cent tariff on imports from India, in response to India “directly or indirectly” importing oil from Russia.
Even as the US is India’s largest trading partner, S&P Global does not see a material drag on growth in the event of imposition of 50 per cent US tariff. It concluded that the tariff may result in a one-off hit to growth, and the overall impact will be marginal and will not derail India’s long-term growth prospects.
GDP growth projection
S&P Global has projected India’s real GDP growth at 6.5 per cent this year, which compares favorably with emerging market peers amid a broad global slowdown. It said that robust public investment and sustained consumer momentum are expected to drive solid growth over the next three to four years. S&P also anticipated that policy continuity following the elections will bolster further economic reforms and fiscal consolidation, reinforcing the country’s medium-term growth trajectory.
“We anticipate solid consumer and public investment dynamics to propel real GDP growth to 6.5 per cent in fiscal 2026 and to average 6.8 per cent over the next three years,” S&P Global said.