S&P Upgrade Should Open a Window for Structural Reforms

S&P Global Ratings’ decision to raise India’s sovereign credit rating from ‘BBB-’ to ‘BBB’ is a significant endorsement of the country’s macroeconomic stability and fiscal discipline. The agency’s projections of 6.8% average GDP growth over the next three years, a gradual narrowing of fiscal deficits, and a decline in the debt-to-GDP ratio to 78% by 2029 signal confidence in India’s economic direction. Effective inflation control and relatively low trade dependence have also been cited as factors that make India more resilient to external shocks.

An sovereign rating upgrade can help reduce sovereign and corporate borrowing costs, improve investor perception, and strengthen India’s case in global capital markets. But the value of such recognition lies in how it is used. This moment offers policymakers a rare opportunity to address structural weaknesses that could otherwise limit the benefits of the rating improvement.

Investment Momentum
Public investment has been a central pillar of growth in recent years, particularly through infrastructure expansion. However, private capital expenditure remains weak. CMIE data show that net fixed assets of non-financial companies grew by only 5% over the seven years ending 2024-25, despite stronger corporate profitability after the pandemic. 

Intended private capex for 2025-26 has dropped by a quarter from the previous year, and government capex is also moderating. New project announcements fell to ₹0.6 trillion in the first quarter of 2025-26 from ₹1.5 trillion a year earlier, while project cancellations have averaged ₹1.6 trillion since the second quarter of 2024-25.

This pattern risks over-reliance on public spending and limits the economy’s capacity to scale up growth. Unlocking private investment will require a sharper focus on reducing regulatory friction, speeding up project approvals, and directing incentives to sectors where India has clear competitive potential. Policy predictability, particularly in taxation and trade, will be key to shifting private sector sentiment.

Household Resilience
Sustained growth depends on the spending power and confidence of households, yet recent trends suggest caution. RBI’s KLEMS data indicate that 46.5% of workers were in low-productivity agricultural jobs in 2024, reversing some of the structural shift towards industry and services seen in earlier years. Real wages have been largely flat for six years, even for regular wage earners, and the rise in nominal incomes over the past seven years has been roughly half the increase in government debt.

High indirect taxes, reduced subsidies, and an income tax burden now exceeding corporate taxes have placed additional strain on disposable incomes. This has led to a growing reliance on borrowing to sustain consumption. 

Over the past six years, personal loans have accounted for 76% of incremental bank lending of ₹33 trillion to households and industries. While this has supported near-term spending, it leaves households more vulnerable to income shocks and raises the risk of a future credit cost cycle. Strengthening household resilience will require measures that expand employment in higher-productivity sectors, lower the cost burden for middle- and lower-income groups, and raise workforce skills to match industry needs.

External Preparedness
S&P’s view that India’s lower trade reliance offers protection from external shocks is partly valid, but the global trade environment is becoming more complex. The experience of 2019, when India’s growth slowed sharply during the US-China tariff dispute, illustrates that global disruptions can still spill over to domestic performance through investment sentiment, financial markets, and supply chain linkages.

Today’s environment is even more challenging, with higher tariffs more widespread and supply chains being redrawn. India’s direct exposure to US trade measures may be limited in value terms, but the indirect impact through shifting global trade flows could be significant. Building resilience will mean diversifying export markets, deepening regional and bilateral trade ties, and accelerating efforts to integrate domestic manufacturing into global value chains. At the same time, safeguarding access to capital flows will be essential to maintaining macroeconomic stability.

Recognition To Momentum
The upgrade from S&P is a valuable endorsement of India’s macroeconomic management and offers a tailwind for investor sentiment. It also creates a moment when the political and policy focus can shift to the reforms needed for the next phase of growth. The areas for priority action are clear:

• Accelerating private investment through predictable policy and targeted incentives.
• Strengthening household incomes and employment opportunities to expand the base for sustainable consumption.
• Preparing the economy for a more uncertain global trade environment.

Delivering on these fronts will not only help safeguard the rating gain but also ensure that India moves closer to a higher and more inclusive growth trajectory. The challenge now is to build on it before global and domestic headwinds test the country’s economic resilience.