Fitch affirms India's sovereign rating at BBB- with stable outlook

The Fitch Ratings on Tuesday affirmed India’s sovereign rating at the lowest investment grade (BBB minus) with stable outlook holding that the country’s robust medium-term growth outlook is a key supporting factor.

“India's rating reflects strengths from a robust growth outlook compared to peers and still-resilient external finances, which have supported India in navigating the large external shocks during the past year. These are offset by India's weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita,” the rating agency said on Tuesday.

Explaining its rating sensitivities, Fitch said factors such as rising government debt to GDP ratio from insufficient fiscal consolidation, a structurally weaker real GDP growth outlook due to weak reform implementation may individually or collectively lead to negative rating action.

However, the rating agency said the factors that could lead to positive rating action include implementation of a credible medium-term fiscal strategy to bring general government debt down towards the levels of 'BBB' category peers and higher medium-term investment; and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector.

Fitch said it expects a gradual narrowing of the general government deficit to 9.2 per cent of GDP in FY24 and 8.7 per cent in FY25 on the back of continued declines in central government deficits.

“We forecast the central government to set a 6.0 per cent of GDP deficit target in its upcoming budget and to retain its 4.5 per cent FY26 target, though we believe this may be difficult to achieve. Fiscal pressures could arise from upcoming national elections in May 2024, but the incumbent government's dominant political position likely limits these risks,” it added.

The rating agency said India is somewhat insulated from the gloomy global outlook in 2023, given its modest reliance on external demand. “Nevertheless, we expect declining exports, heightened uncertainty and higher interest rates to slow growth to 6.2 per cent in FY24 (from projected 7 per cent in FY23). We also expect consumption growth to moderate as pent-up demand fades,” it said.

Fitch said India's robust medium-term growth outlook is a key supporting factor for the rating.

“A clear improvement in corporate and bank balance sheets, which were under strain prior to the pandemic, is likely to facilitate a steady acceleration in investment in the coming years. The government's ongoing infrastructure drive and reform agenda, along with efforts to attract greater FDI inflows, supplement these prospects. Nevertheless, risks remain given dynamics in labour force participation, the lagging rural sector recovery, and uneven reform implementation record,” it cautioned.

The rating agency projected the current account deficit (CAD) to rise to 3.3 per cent of GDP in FY23 from 1.2 per cent in FY22, due to a rising import bill from high commodity prices and robust domestic demand, and declining exports. “The larger trade deficit has been partially offset by strong services exports and remittance inflows. In FY24, we expect the deficit to narrow to 2.5 per cent of GDP as commodity prices ease. The pick-up in FDI would also support moderate CAD,” it said.