Global rating agency Fitch Ratings on Monday affirmed India’s long-term foreign-currency issuer default rating (IDR) at ‘BBB-‘ with a stable outlook.
Fitch said the country’s rating “reflects strength from a strong growth outlook” compared to peers and resilient external finance. The agency said it has supported India in weathering major external shocks over the past year.
“These are offset by India’s weak public finances, illustrated by high deficits and debt relative to peers, as well as weak structural indicators including World Bank governance indicators and GDP per capita,” Fitch said.
India poised for strong growth
In its ratings commentary, Fitch also forecast India to be one of the fastest-growing “Fitch-rated” sovereigns globally, at 6 per cent in the fiscal year ending March 24.
The agency said this would be supported by resilient investment prospects, but highlighted that the country’s growth would face challenges from high levels of inflation, high interest rates and global demand as well as fading pandemic-induced pent-up demand. confronts.
Taking these headwinds into account, Fitch said they expect growth to slow from their FY23 forecast of 7 per cent before rebounding to 6.7 per cent by FY2025.
Fitch also indicated that India’s growth prospects have brightened as the private sector is set for strong investment growth following improvements in corporate and bank balance sheets over the past few years, supported by the government’s infrastructure drive.
On the other hand, the agency indicated that risks remain due to the low labor force participation rate and uneven reform implementation record.
“India’s large domestic market makes it an attractive destination for foreign firms. However, it is unclear whether India has undertaken sufficient reforms to adequately benefit from the opportunities offered by deeper integration into global manufacturing supply chains, including China. Will be able to realize or not. +1 Corporate strategies that encourage diversification across investment destinations,” Fitch added.
The agency highlighted several other positives, including financial sector reforms, moderation in inflation, reduction in current account deficit, flexible external liquidity buffers, ESG-regime and narrowing deficit deficit, which could benefit the Indian economy.
some challenges remain
While the agency has supported India’s growth, it also said the country is on a “challenging consolidation path”.
“The government’s medium-term fiscal guidance retained its CG deficit target of 4.5 per cent of GDP by FY26, but provided limited details on how this would be reached,” Fitch said.
“The government has demonstrated recent commitment to meeting its budget targets. However, we believe that achieving this target will be challenging, requiring accelerated consolidation of 0.7pp per year in FY25 and FY26, while PPP in FY24 as compared to 0.3pp in FY23 and 0.5pp. Future deficit reduction is likely to come primarily from trimming expenditure, in our view,” the agency said.
Another challenge, according to Fitch, is the high public debt burden. “India’s general government debt remains elevated at Fitch’s FY23 estimate of 82.8 per cent, relative to the ‘BBB’ median of 55.4 per cent,” Fitch said.
“Under our debt dynamics, we estimate debt to remain broadly stable at around 83 per cent of GDP in FY28 with strong nominal growth of around 10.5 per cent and an assumption of continued gradual consolidation.”
The lack of a sustained debt cut is likely to raise the risk to the rating if India faces a future economic downturn.