Page 34 - Policy Economic Report -August 2026

POLICY AND ECONOMIC
OIL & GAS MARKET

compared with 5.1 per cent in the previous year. S&P considers the continued emphasis on infrastructure
investment important for addressing India's physical infrastructure gap and strengthening the economy's
productive capacity over time.

India's economic diversification is also expected to provide a buffer against sector-specific shocks. While
weaker rainfall and volatile agricultural input costs are likely to affect the rural economy, agriculture's
impact on overall growth is expected to be moderated by the increasing contribution of services, finance,
technology, infrastructure and manufacturing. S&P also highlights India's favourable demographics and
competitive unit labour costs, together with stronger corporate and financial-sector balance sheets
compared with the pre-pandemic period, as structural factors supporting medium-term growth.

The fiscal position remains the principal weakness in India's sovereign credit profile. Although S&P expects
gradual fiscal consolidation to continue, it anticipates some pressure on the fiscal deficit during FY2026–
27 from fuel-excise duty reductions and potentially higher fertilizer subsidies. The agency projects the
general government deficit at 7.3 per cent of GDP in FY2027, gradually declining to 6.6 per cent by FY2030.
At the same time, the ratio of net general government debt to GDP is projected to decline from 85.4 per
cent in FY2025 to 79.3 per cent by FY2030, supported by India's favourable growth-to-interest-rate
differential.

The country's external position remains a significant strength in the sovereign assessment. S&P expects
India's current account deficits to remain modest over the next three years, supported by stabilising
domestic demand and improved export competitiveness from a weaker rupee. Although volatile
commodity prices and geopolitical developments, particularly those affecting energy markets, remain
risks, India's limited external debt and substantial foreign-exchange reserves provide an important
cushion against external shocks.

Inflation is also expected to remain manageable. S&P notes that India's transition to an inflation-targeting
framework has helped anchor inflation expectations, with CPI inflation averaging around 4.0 per cent over
the past three years. Although inflation increased to 4.4 per cent year-on-year in June 2026, driven by
food inflation and elevated energy prices, the agency expects inflation to remain within the RBI's 2–6 per
cent target range over the next three to four years.

The stability of India's banking and financial system further supports the credit profile. S&P's assessment
notes that the banking sector has significantly reduced the stock of problem assets accumulated during
the previous downturn, with asset quality continuing to improve. India's relatively deep domestic capital
markets also support effective monetary-policy transmission and provide the government with continued
access to domestic funding.

The stable outlook reflects S&P's expectation that policy continuity, high infrastructure investment and
gradual fiscal consolidation will underpin India's growth prospects over the next 24 months. A
deterioration in political commitment to fiscal consolidation or a structural slowdown in economic growth
could place downward pressure on the rating. Conversely, a meaningful narrowing of fiscal deficits,

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