Nomura India finds the timing of S&P Global Ratings' upgrade of India's outlook from 'Neutral' to 'Positive' somewhat puzzling. The financial firm believes that the results of the upcoming 2024 Lok Sabha elections will significantly impact India's macroeconomic prospects, especially if there is a change in government.
If the current National Democratic Alliance (NDA) returns to power and the ruling Bharatiya Janata Party (BJP) secures a simple majority—as is widely anticipated—S&P's base case for India should hold, eventually leading to a potential rating upgrade.
However, Nomura describes S&P’s decision as "peculiar" for seemingly dismissing political risks. It warns that different political outcomes could cloud the outlook.
Nomura India's recent survey among institutional investors suggests that if the BJP loses its majority, there could be a decline in growth and fiscal consolidation prospects. In the event of a victory by the opposition Indian National Congress (INC) coalition, most participants foresee medium-term growth dropping below 6.5%, significant fiscal deterioration risks, and even the possibility of continued policy rate hikes by the RBI. Nomura notes these concerns aren't unfounded, as a comparison of BJP and INC manifestos shows the latter being more populist and less inflation-averse.
According to Nomura, its estimates of some election promises indicate a substantial risk of fiscal consolidation derailing. Therefore, while the timing of S&P's rating action might suggest a non-political assessment, Nomura believes the stark differences in the economic outlooks of the main national parties mean that election outcomes are likely to be relevant to India's sovereign rating outlook.
Currently, S&P has stated that regardless of the election results, it expects broad continuity in economic reforms and fiscal policies.
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