India's BBB- rating can improve if the country reduces its fiscal deficit considerably, says S&P's APAC Managing Director, Kim Eng Tan.

The global rating agency currently rates the country as 'BBB-' with a stable outlook, and according to Tan, India's fiscal performance is a crucial factor in this assessment, Moneycontrol reports.

"The starting point of India's fiscal performance has been very weak. Even after the improvements we have seen recently, it remains a very weak fiscal performance compared to the metrics we are assessing it against. As a result, unless we see significantly more fiscal consolidation and bringing deficits down a lot more than what we have seen recently, we are unlikely to see further upside pressures on the rating," Tan stated.

At the state level, rating agencies like S&P assess combined central and state debt and deficit indicators. Forecasts show an expected increase in the country's state fiscal deficits from 2.8% of GDP in 2022/23 to 3.1% in 2023/24, Mint reports.

That said, despite fiscal weaknesses, India's GDP has shown strong growth. Tan went on to add that GDP "has increased smartly."

"The Indian growth story is not going to end this year. However, we have already given India full credit for its economic growth and its other strengths, including its relatively deep domestic bond market, its monetary credibility, and its external balance sheet. Where India can potentially see an upgrade in its credit ratings is an improvement on the fiscal front," Tan said.

In November, S&P upwardly revised India's GDP growth forecast for FY24 to 6.4% from 6% due to robust domestic tailwinds.

"We have revised up our projection for India's GDP growth for fiscal 2024 (ending in March 2024) to 6.4%, from 6%, as robust domestic momentum seems to have offset headwinds from high food inflation and weak exports," according to a note by S&P Global.

However, the rating agency lowered its growth forecast for FY25 to 6.4% from a previous 6.9%.