Global rating major S&P has affirmed the country’s long term rating at BBB-, the lowest investment grade, and said the outlook on the long-term rating is stable.

The rating agency said though risks to long-term growth are rising, if the on-going reform process is executed well, the country’s growth rate would be ahead of its peers.

It also expects there could be a fiscal consolidation over the next three years after a larger fiscal deficit this financial year due to the COVID-19 pandemic.

“The stable outlook reflects our expectation that India’s economy will recover following the containment of the COVID-19 pandemic, and the country will maintain its sound net external position,” S&P said.

“The stable outlook also assumes that the government’s fiscal deficit will recede markedly following a multi-year high in fiscal year 2021 (ending March 31, 2021),” it said.

Can face downgrade

India can face a ratings downgrade over the next 1-2 years if GDP growth fails to meaningfully recover 2021 onwards and the net general government deficits materially exceed forecasts, which would signify weakening of the country’s institutional capacity to maintain sustainable public finances.

On the other hand, there could be an upgrade if the fiscal deficits is significantly curtailed.

Earlier this month, Moody’s downgraded the country’s rating to Baa3 — which was also the lowest investment grade — while maintaining negative outlook.

S&P expects the Indian economy to contract by 5% this fiscal.

It said the country’s productive capacity had been severely disrupted as millions of workers had left their jobs to return home, “sometimes crossing the country to do so.”

“India’s labour markets have therefore weakened dramatically, and may take some time to heal,” it said.

The economy is expected to make a strong comeback in the next financial year as S&P projected 8.5% growth in real GDP in fiscal 2022.

Resilience highlighted

“The economy’s long-term outperformance highlights its resilience. India’s wide range of structural trends, including healthy demographics and competitive unit labour costs, work in its favour.

“A more favourable corporate tax regime, which is particularly supportive of manufacturing firms, should reinforce growth, alongside additional fiscal and monetary easing,” S&P said.