Outlook on 6 Indian banks, state-owned firms revised to positive, ratings affirmed
New Delhi: S&P Global Ratings on Wednesday revised outlook on six Indian banks, including SBI and ICICI Bank to positive from stable, mirroring the rating action on the sovereign.
S&P also revised the rating outlook to positive from stable on state-owned NTPC, ONGC, and Power Grid and affirmed ‘BBB-‘ issuer and issue ratings on these companies.
Earlier in the day, S&P revised the outlook on India to positive from stable; while affirming BBB- ratings. BBB- is the lowest investment grade rating.
The positive outlook reflects our view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with cautious fiscal and monetary policy that diminishes the government’s elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months.
We may raise the ratings if India’s fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7% of GDP on a structural basis. The protracted rise in public investment in infrastructure will lift economic growth dynamism that, combined with fiscal adjustments, could alleviate India’s weak public finances.
We may also raise the ratings if we observe a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility, such that inflation is managed at a durably lower rate over time.
We could revise the outlook to stable if we observe an erosion of political commitment to maintain sustainable public finances, which in turn signifies a weakening of the country’s institutional capacity.
If current account deficits widen materially to weaken India’s external position such that the country becomes a narrow net external debtor, we could also revise the outlook to stable.
Our positive outlook on India is predicated on its robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation. We believe these factors are coalescing to benefit credit metrics.
The Indian economy has staged a remarkable comeback from the COVID-19 pandemic. We estimate real GDP growth in the past three years to have averaged 8.1% annually, the highest in the Asia-Pacific region. We expect these growth dynamics to continue to play out in the medium term, with GDP expanding close to 7.0% annually over the next three years. This has a moderating effect on the ratio of government debt to GDP despite still-wide fiscal deficits.
The quality of government spending has improved in the past four to five years. The Modi administration has increasingly shifted budget allocation to infrastructure spending. Capital expenditure is scheduled to increase to Indian rupees (INR) 11 trillion, or about 3.4% of GDP in fiscal 2025 (April 1, 2024, to March 31, 2025). This is almost 4.5x from a decade before. We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth.
India’s weak fiscal settings had always been the most vulnerable part of its sovereign ratings profile. With economic recovery now well on track, the government is again able to depict a more concrete (albeit gradual) path to fiscal consolidation. Our projections indicate general government deficit of 7.9% of GDP in fiscal 2025 to slowly decline to 6.8% by fiscal 2028.
Irrespective of the June 2024 general election results, we expect the incoming government to carry on economic reforms to support the growth vigor, continued infrastructure investment drive, and commitment to fiscal consolidation.
The sovereign ratings on India are anchored by a dynamic and fast-growing economy, strong external balance sheet, and democratic institutions that support policy predictability. Counterbalancing these strengths are the government’s weak fiscal performance and burdensome debt stock, as well as low GDP per capita.
India is benefitting from strong consumer and investor sentiments heading into the general elections (April-June 2024). The recovery from its pandemic nadir has been impressive as it remains among the best-performing emerging market economies in the world. The total size of the Indian economy is now estimated to be 46% larger (in rupee terms) than it was pre-COVID. Three years of above-trend real GDP growth underscore this. That said, economic expansion is normalizing toward a more sustainable level. Fiscal 2025 will also be subject to comparison with a strong year-ago base.
Nevertheless, the economy maintains good momentum. We anticipate solid consumer and public investment dynamics will propel real GDP growth to 6.8% in fiscal 2025, 6.9% in fiscal 2026, and 7.0% in fiscal 2027.
Surging capital expenditure (capex) by the central government and, to some extent, by state governments will help to spur investment and construction activities. Based on budget plans for fiscal 2025 and our expectation of strong revenue growth, this support is likely to continue.
Central government receipts are broadly on track, rising to INR22.5 trillion in the first 11 months of fiscal 2024. This number constitutes 82% of the full-year target in the fiscal 2024 budget.
Improvements in payroll (based on data from the Employees’ Provident Fund Organization) during fiscal 2024 suggest a stronger labor market with an 11.4% increase in formal job creation. This is expected to continue boosting consumption over the coming quarters.
The performance of the Indian economy in recent years highlights its historical resilience. We also predicate our projections for solid growth (notwithstanding external headwinds) on the country’s constructive structural trends. The trends include healthy demographics and competitive unit labor costs. Additionally, we believe India’s corporate and financial sectors have stronger balance sheets than before the pandemic.
The country’s introduction of a goods and services tax (GST) in 2017 continues to bear fruit. Total receipts increased 11.7% to INR20 trillion under the program in fiscal 2024. The year before, it surged by 21.5%. We expect this trend to continue, and for the GST regime to be an anchor for the government’s expanding revenue base.
The Indian general elections are ongoing with the results slated to be announced on June 4. Regardless of the outcome, we believe there will be broad continuity in economic policies in the coming years. Since the beginning of economic liberalization in 1991, India has had consistently high GDP growth while governed by different political parties and coalitions–reflecting a consensus on key economic policies.
In our view, the success of the next government in funding large infrastructure investment without substantially widening the country’s current account deficit will be important. If India can shrink the fiscal deficit significantly while achieving these objectives, rating support will strengthen over time.
The central government has been tilting toward capex spending in the past few years. Following sharp increases of 25% and 28% in total effective capex in fiscal years 2023 and 2024, respectively, it has budgeted for 17% rise in allocations in fiscal 2025.
The higher allocations to capex have improved the quality of government spending. More effective capex programs will help to alleviate a widespread shortfall in physical infrastructure and, over time, enhance the productive capacity of the economy.
The Indian government also re-emphasized its production-linked incentive scheme in its latest budget, making larger allocations to the electronics and information technology sectors, as well as automobiles and components. Such incentives may increase foreign investment in manufacturing, which has also become more attractive to foreign firms looking to diversify supply chains in the region.
Progress in building India’s manufacturing sector will also depend on further liberalization of the labor market. The central government passed four labor codes in 2020 but they have yet to be fully implemented by state governments. More flexible labor markets could help to spur the creation of higher-earning manufacturing jobs.
