Rating Upgrade Shows Reforms Paying Off: S&P's Phua

After S&P upgraded India's sovereign rating, Yee Farn Phua, director of sovereign and international public finance ratings for Asia at S&P Global Ratings, explained the rationale behind the rating action in a video interview with Asit Ranjan Mishra. Edited excerpts:

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What has changed fundamentally since your last review of India that led to the sovereign rating upgrade?

As you know, we changed the outlook for India to positive last year, largely because we saw a demonstrated drive towards fiscal consolidation. We also believe that gross domestic product (GDP) growth is very healthy, which has supported fiscal metrics. We also took into account the fact that the government is increasingly putting money into infrastructure spending, helping to further grow the economy down the road.

This improving quality of government spending, we believe, bodes well for the future economic trajectory. These factors continue to play out. This year, we are continuing to see the government demonstrate its political commitment to cut deficit. As you can see, the central deficit has been declining quite quickly. At the same time, GDP growth continues to be strong.

Also, this time around, we took into account the fact that the monetary policy environment is a lot more conducive in India these days. In the past three to four years, inflation has come down significantly compared to a decade ago. I think that bears testament to the Reserve Bank of India's monetary policy framework, which we believe has borne fruit. That's why we think all these factors are coming together now to create a positive trajectory for India's credit metrics.

Some of the fundamental constraints for India's sovereign rating, as pointed out by various rating agencies including S&P, are low per capita income, a high debt-to-GDP ratio, and high interest payments. Has the outlook changed on these fundamental parameters?