18 years later, S&P upgrades India’s sovereign rating, says US tariffs impact ‘manageable’ | Business News

S&P rates countries based on its assessment of five key areas: institutional, economic, external, fiscal, and monetary. BBB rating indicates “adequate capacity to meet financial commitments, but more subject to adverse economic conditions”, as per the rating scale of the agency.

The S&P analysts took a far more sanguine view of the 25 per cent tariff on India that US President Donald Trump had announced first, and later doubled to 50 per cent because of New Delhi’s import of Russian arms and energy. While some economists estimated the tariffs to pull growth down by up to 50 basis points, S&P analysts said the effect on the Indian economy will be “manageable”.

“India is relatively less reliant on trade and about 60 per cent of its economic growth stems 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,” the S&P analysts said.

Welcoming the decision, the finance ministry said in a post on social media platform X, “India has prioritised fiscal consolidation, while maintaining its strong infrastructure creation drive and inclusive growth approach, that has led to the upgrade. India will continue its buoyant growth momentum and undertake steps for further reforms to attain the goal of Viksit Bharat by 2047,” it said.

The government has over the last several years aggressively pursued the three global agencies — S&P, Moody’s Ratings, and Fitch Ratings —for higher ratings that, in its opinion, better reflect the country’s fundamentals. In fact, it had expressed its displeasure earlier and said the agencies’ methodologies are biased against emerging economies. The Economic Survey for 2020-21 had a chapter titled ‘Does India’s Sovereign Credit Rating reflect its fundamentals No!’.

While still at the lowest investment-grade rung, the upgrade brings India one step closer to the coveted ‘A’ category of ratings, which is an indicator of higher creditworthiness to investors globally. According to Ranen Banerjee, Partner and Economic Advisory Leader, PwC India, the rating upgrade will lead to more foreign capital inflows into India and be a “major positive rub on currency exchange rate”. “This can also cause the overall borrowing costs for the government as well as private sector to go down,” he said.

Calling the upgrade a “pivotal signal for global investors”, Sachin Sawrikar, Managing Partner of Gujarat’s Gift City-based Artha Bharat Investment Managers IFSC LLP, said the timing of S&P’s announcement is notable as it comes amid rising geopolitical uncertainty and tariff tensions with the US.

While India’s GDP growth has edged lower recently — the 6.5 per cent rate recorded in 2024-25 was the lowest in four years, with growth in the current fiscal also seen at the same level, as per the Reserve Bank of India (RBI) — S&P said the economic expansion was now “normalising toward a more sustainable level with good momentum”.

“We recognise, however, that India’s high growth rates need to be sustained over a long period of time for the economy to create sufficient jobs, reduce inequality, and reap the full benefit of its favorable demographics,” S&P said.

On the inflation front, S&P said the RBI’s record of inflation management had been burnished by headline retail inflation staying broadly within the 2-6 per cent target range. The external position, meanwhile, is seen as key to India’s credit profile, with current account deficits likely to remain small over the next few years.

Improving public finances

Over the years, ratings agencies have repeatedly cited India’s high government deficits and debt levels as a key weakness. However, S&P said on Thursday with the economic recovery “now well on track”, the government can project a more “concrete” consolidation of its finances. According to S&P, the combined fiscal deficit of the Central and state governments is seen at 7.3 per cent of GDP in 2025-26, which it expects to decline to 6.6 per cent by 2028-29.

Even as the fiscal deficit declines, the quality of government expenditure is seen improving, continuing the trend of the last half decade over which the funds allocated for creation of new infrastructure has increased. As per Union Budget 2025-26, the Centre has targeted a capital expenditure of Rs 11.21 lakh crore for the current fiscal, up from the Rs 3.36 lakh crore spent in 2019-20.

“Adding capital spending by states, total public investment in infrastructure is estimated at around 5.5 per cent of GDP, which is on par or higher than sovereign peers. We believe the improvements in infrastructure and connectivity in India will remove chokepoints, which are hindering long-term economic growth,” S&P said.

In terms of debt, S&P expects India’s net Central plus state debt to decline to 78 per cent of GDP by 2028-29 from 83 per cent in 2024-25, bringing it closer to pre-pandemic levels.

The Centre has targeted a reduction in its debt-to-GDP ratio to 49-51 per cent by 2030-31 from 57.1 per cent in 2024-25. States do not have a debt target. Rating agencies view government debt on a consolidated basis – Centre plus states.