LS results won't cast a shadow on fiscal improvements in India: S&P

S&P said it does not expect recent parliamentary election results to have a major negative impact on the prospects for fiscal improvements in India

S&P Global Ratings on Friday said it does not expect recent general election results to cast a shadow on the prospects for fiscal improvements in India, even as the US credit rating agency suggested that it may further raise the country’s ratings if fiscal deficits narrow meaningfully.

S&P had raised India’s sovereign rating outlook to 'positive' from 'stable' in May this year.

“Tax revenue in the country has risen to its highest level in more than 10 years. The increased revenue has allowed the government to raise government investment to about 4 per cent of GDP, the highest in more than 10 years. We expect the new BJP government to sustain these improvements, even if it is no longer the majority party in Parliament,” it added.  

The rating agency, in its Asia-Pacific sovereign rating mid-year trends report, also said,

“Our fiscal and debt assessments currently offer very weak support for our ratings on India. Unless the deterioration in fiscal settings is very serious, we do not expect the sovereign rating on India to fall below investment grade.”

While maintaining its positive outlook on India’s lowest investment grade sovereign rating, S&P said in the next two to three years, the rising tax revenue trend is likely to result in reduced deficit.

“We may raise the ratings if India’s fiscal deficits narrow meaningfully such that the net change in general government debt falls below 7 per cent of GDP on a structural basis,” it added.

However, S&P also cautioned that India’s outlook could be revised downwards to “stable” if there is a decline in political commitment to maintaining sustainable public finances, indicating 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,” the rating agency said.