Future upside movement in ratings will be a function of faster pace of fiscal consolidation, according to YeeFarn Phua, director at S&P Global Ratings, which upgraded India's sovereign rating to BBB from BBB- with a stable outlook.
The rating was upgraded citing economic resilience and sustained fiscal consolidation. "We may raise the ratings if fiscal deficits narrow meaningfully such that the net change in general government debt falls below 6% of GDP on a structural basis," the release also stated on Thursday.
The government's demonstrated commitment to fiscal consolidation, along with a healthy GDP growth that is helping steady the credit matrix, have resulted in the upgrade, Phua told NDTV Profit in an interview.
Apart from the deficit, what also needs to be taken into account is the improvement in the quality of government spending and subsidies coming down, along with monetary policy and inflation developments, he added.
"The stable outlook reflects our view that continued policy stability and high infrastructure investment will support India's long-term growth prospects. That, along with cautious fiscal and monetary policy that moderates the government's elevated debt and interest burden, will underpin the rating over the next 24 months," S&P Global said.
If you look at India's overall picture — central, plus state governments — the decline in deficit by the Union government has been quite fast from the peak of Covid, he said.
On the other hand, the state government's decline in deficit has been a lot slower. The central government is likely to continue to consolidate its spending going forward too, while the state governments too will have to chip in to consolidate the overall deficit, he added.
Addressing the elephant in the room, Phua does not expect the impact of tariffs to be substantial. India's exports to the US constitute about 2% of the GDP.
Factoring in sectoral exemptions on pharmaceuticals and consumer electronics, the exposure of Indian exports subjected to tariffs is lower at 1.2% of the GDP, Phua said. "Though this may eventually result in a one-off hit to growth, we envisage the overall impact to be marginal and will not derail India's long-term growth prospects."
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