Fitch Affirms India's sovereign rating at 'BBB-'
Business environment, though difficult, is showing improvement
 "Fitch Affirms India's sovereign rating at 'BBB-'")
The rating agency affirmed India’s long-term foreign and local currency issuer default ratings at BBB. The outlook on the rating is ‘stable’.
India’s positive economic growth outlook stands out globally. India’s real gross domestic product (GDP) is expected to accelerate to 7.5 per cent in FY16 and eight per cent in FY17, up from 7.3 per cent in FY15. The betterment in economic growth rate is supported by the government’s beefed-up capital expenditure and gradual implementation of a broad-based structural reform agenda, Fitch said in a statement.
The Reserve Bank of India’s policy rate cuts (of a total of 125 basis points in 2015) are also likely to contribute to higher growth. But, monetary transmission is impaired by relatively weak banking sector balance sheets. India's real GDP growth averaged 6.7 per cent over the past five years, which is considerably higher than the 'BBB' range median of three per cent.
Fitch pointed out that India's relatively weak business environment and standards of governance are gradually improving as a result of the pursued reforms, but obstacles faced by investors, including infrastructure bottlenecks, have not been reduced overnight.
India moved up four places in the World Bank's Ease of Doing Business rankings in 2015, but is still the worst-performing of all 'BBB' range sovereigns at 130th out of 189 countries. Translation of structural reforms into improved indicators and higher real GDP growth depends on actual implementation, it said.
The government continues to steadily roll out its ambitious structural reform agenda including changes in the foreign direct investment (FDI) regime. It has so far turned out difficult for the government to garner the required support in the Upper House (Rajya Sabha) for some big ticket reforms, including a national Goods and Services Tax. But those reforms that only require executive approval continue to be implemented and legislative reforms can still be pursued at the state level.
India's sovereign ratings continue to be constrained by limited improvement in its fiscal position. The seventh Pay Commission's recommendation of a 23.6 per cent increase in remuneration for central government employees raises doubts about the feasibility of the medium-term consolidation path without any new revenue-generating measures.
Fitch expects a general government fiscal deficit, including both the central government and the states, of 6.7 per cent in FY16, more than double the 'BBB' peer median of 2.8 per cent. The general government debt burden is expected to to rise to 68.8 per cent of GDP in FY16 from 66.8 per cent in FY15. The increase largely results from state governments taking part of the power distribution companies' debt onto their own balance sheets. This reform is considered credit positive, as it is accompanied by reinforced incentives for states to improve the functioning of these companies.
Public sector banks form a contingent liability for the government's finances in the years ahead. The banking sector's non-performing loans, which Fitch expects to reach 4.9 per cent of total assets in FY16, are likely to hamper banks' ability to internally generate capital at a time when they will require capital to transition towards Basel III by FY19.
It remains to be seen if the government's planned capital infusion of Rs 70,000 crore into the public sector banks will be adequate in light of supervisory norms and weak equity valuations, Fitch said.