Image used for representation purpose only.
| Photo Credit: Getty Images/iStockphoto

Image used for representative purpose only
| Photo Credit: Getty Images/iStockphoto

S&P Global Ratings on Monday (November 25, 2024) revised down its estimate for India’s economic growth in the next two financial years as high interest rate and lower fiscal impulse temper urban demand.

In an update to its economic forecast for Asia-Pacific economies after U.S. election results, the rating agency projected a 6.7% GDP growth rate in 2025-26 financial year (April 2025 to March 2026) and 6.8% in the following fiscal year, down from 6.9% and 7%, respectively in previous projections.

For FY25, S&P Global pegged GDP growth rate at 6.8%.

“In India we see GDP growth easing to 6.8% this fiscal year as high interest rates and a lower fiscal impulse temper urban demand. While purchasing manager indices (PMIs) remain convincingly in the expansion zone, other high-frequency indicators indicate some transitory softening of growth momentum due to the hit to the construction sector in the September quarter,” it said.

The agency expects India’s GDP to grow at 7% in FY28.

S&P retained its growth projection for China at 4.8% in 2024 but cut next year’s forecast to 4.1% from 4.3% earlier and to 3.8% in 2026 from the previous estimate of 4.5%.

“The impending change in the U.S. administration will be challenging for China and the rest of Asia-Pacific. US tariff increases have become more likely, especially on China, and possible changes in the US macro picture are leading to different interest rate expectations,” said the report titled ‘Economic Outlook Asia-Pacific Q1 2025: US Trade Shift Blurs The Horizon’.

Louis Kuijs, S&P Global Ratings Asia-Pacific Chief Economist, said rising risks are blurring the economic outlook for Asia-Pacific in the first quarter of 2025.”While much of the region should be able to continue to grow solidly, central banks will probably remain cautious by not reducing their policy rates too fast.”

China’s stimulus measures should support growth, but S&P expected its economy to be hit by U.S. trade tariffs on its exports.

The Asia-Pacific growth will be impeded by slower global demand and U.S. trade policy. But lower interest rates and inflation should ease their drag on spending power.

S&P Global Ratings in a report said the business groups such as Birla, Mahindra, Hinduja, Hero, ITC, Bajaj and the Murugappa groups have a record of conservative growth. File 
| Photo Credit: Photo: Twitter/@SPGlobalRatings

“India’s large business groups will spend about $800 billion on growth over the next 10 years, almost triple of what they spent over the prior decade,” S&P Global Ratings said in a report on Monday (October 14, 2024.)

“About 40% of Indian conglomerates’ spending over the coming decade will be on new businesses, such as green hydrogen, clean energy, aviation, semiconductors, electric vehicles (EVs) and data centres,” Neel Gopalakrishnan, Credit Analyst, S&P Global Ratings, said.

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“The Vedanta, Tata, Adani, Reliance and JSW groups alone are prepping about $350 billion of investment in these sectors over the next decade,” he said.

Stating that many of the other conglomerates will focus more on their established businesses, with an emphasis on boosting scale and profitability, S&P Global Ratings in the report said the business groups such as Birla, Mahindra, Hinduja, Hero, ITC, Bajaj and the Murugappa groups have a record of conservative growth. 

“Indian conglomerates will likely invest about $400 billion-$500 billion over the next 10 years in existing businesses, if they continue investing at a similar rate as that seen over the past two years,” it said. “The opportunity for growth for Indian conglomerates is huge,” said Mr. Gopalakrishnan. 

“But the heavy spending on investment also presents risk — execution risk and the risk of borrowing heavily on technology with unproven commercial payoff, such as green hydrogen,” he added. 

As absolute debt levels rise, firms will need to continuously strengthen their core businesses to maintain their credit profiles. Any underperformance during the investment phase would likely hit credit metrics, as per the report. 

The S&P Global logo is displayed on its offices in the financial district in New York City, U.S. File
| Photo Credit: Reuters

S&P Global Ratings on Friday said it will watch the fiscal numbers for the next 1-2 years, besides pro-growth policies of the new government, before deciding on India’s sovereign rating upgrade.

S&P, which earlier this week upgraded India’s outlook to positive while retaining the sovereign rating at BBB-, expects the new government to continue with pro-growth policies, infrastructure investment and commitment to fiscal consolidation.

“Within the next 2 years we will be closely observing whether the government’s depiction of fiscal consolidation path will carry on… We will be observing for the next 1-2 years to see how this fiscal numbers will come to pass and if so, this will lead to a rating upgrade,” S&P Global Ratings Analyst YeeFarn Phua said in a webinar.

BBB- is the lowest investment grade rating.

As per the consolidation roadmap, the fiscal deficit, which is the difference between government’s expenditure and revenue, will come down to 4.5 per cent of GDP by March 2026, from an estimated 5.1% at the end of March 2025.

Mr. Phua said once the impact of high infrastructure investment is realised and bottlenecks are removed, India’s long-term growth potential could be 8%.

He said India has enjoyed a consistently high GDP growth rate despite being governed by different parties and coalitions since the economic liberalisation in 1991.

“This reflects national consensus on key economic policies. We do believe that post election this pro-growth policy will continue and political commitment of fiscal consolidation will carry on as well for coming years. No matter who the incoming government is, the pro-growth policies, sustained infrastructure investments, the drive to reduce fiscal deficit — these things have produced very good outcomes and we believe that this will continue in the coming years no matter who is in charge,” he said.

Results of the ongoing Lok Sabha elections will be announced on June 4.

Mr. Phua said he expects the general government (Centre + States) deficit to reduce to 6.8% of GDP by 2028, from 7.9% currently.

S&P Director (Asia Pacific Sovereign Ratings) Andrew Wood said India’s fiscal performance remains relatively weak compared to some emerging market peers. Fiscal deficit of BBB rated sovereigns — Malaysia, the Philippines, Indonesia, Thailand, Vietnam — would be below 4% this year, compared to 7.9% in case of India.

However, in deciding India’s sovereign rating, S&P also took into account change in net general government debt, as well as dynamics like health of economy, associated growth prospects, attractiveness of the debt that the government is selling and ability to finance deficits.

“We see that India’s growth performance has been very strong over recent years and we expect it to be very strong in the near future. The quality of expenditure programme of India has improved remarkably over the past few years and that gives us more confidence that growth is going to be sustained at a higher rate in the future,” Mr. Wood said.

While S&P sees India’s fiscal deficit as high, it also anticipates more room for improvement going forward and that would be reflected in the rating, Mr. Wood added.

With regard to growth prospects, Mr. Phua said S&P expects India to grow at 6.8% this fiscal but in next 2-3 years it is expecting around 7% growth.

“We expect India’s medium term growth potential to be around 7% or so…. Once the infrastructure investments are in and connectivity improves, for India to grow at 8% over the longer term is something that is quite possible,” he said.

The above average growth has given India better economic assessment compared to peers of similar income levels, Mr. Phua said, adding S&P believes growth prospect remains strong and India’s growth is sustainable at 7%.