Fitch affirms India's sovereign rating at 'BBB-' on robust growth outlook

Weak spots: High deficit, lagging governance indicators, lack of sustained debt reduction

Fitch Ratings has affirmed India's long-term foreign-currency issuer default rating (IDR) at 'BBB-' on its strengths from a robust growth outlook (compared to its peers) and resilient external finances. These factors have supported India in navigating large external shocks over the past year, the global rating agency said.

However, these strengths are offset by the country's weak public finances, illustrated by high deficits and debt relative to its peers, it noted. Lagging structural indicators, including World Bank governance indicators and per capita Gross Domestic Product (GDP), are other weak spots.

The outlook on rating is stable.

Supported by resilient investment prospects, India is expected to be one of the fastest growing Fitch-rated sovereigns globally at six per cent in the fiscal year ending March 2024 (FY24). Still, headwinds from elevated inflation, high interest rates and subdued global demand, along with a fading pandemic-induced pent-up demand, will slow the growth from an estimate of 7 per cent for FY23. It would rebound to 6.7 per cent by FY25.

Robust medium-term outlook

A strong growth potential is a key supporting factor for the sovereign rating.

Growth prospects have brightened as the private sector appears poised for stronger investment growth after an improvement in corporate and bank balance sheets in the past few years, which was supported by the government's infrastructure drive. Still, risks remain, given low labour force participation rates and an uneven reform implementation record, Fitch added.

India's large domestic market makes it an attractive destination for foreign firms. However, it is unclear whether India will be able to realise sufficient reforms to allow the economy to benefit substantially from the opportunities offered by the deeper integration in global manufacturing supply chains. Service sector exports, though, are likely to remain a bright spot.

A challenging path to fiscal consolidation

Fitch said the general government deficit (excluding divestments) is expected to decline to 8.8 per cent of the GDP in Fy24 from 9.2 per cent in Fy23. The 8.8 per cent, though less than the previous year, is still high. The central government has retained its medium-term fiscal guidance of a deficit target of 4.5 per cent of the GDP by FY26. It has, however, provided limited details on how this would be achieved, though it has demonstrated a commitment to meeting its Budget targets. 

Achieving this target would be challenging. It would require accelerated consolidation of 0.7 pp per year in FY25 and FY26, compared to 0.3 pp in FY23 and 0.5 pp in FY24. Future deficit reduction is likely to be achieved mainly by trimming expenditure.

High public debt burden

India's general government debt remains elevated in Fitch's estimate: 82.8 per cent in FY23 relative to the 'BBB' median of 55.4 per cent. The median is for countries with a “BBB” rating profile.

Under our debt dynamics, the agency said, debt would remain broadly stable at around 83 per cent of the GDP in FY28, assuming robust nominal growth of around 10.5 per cent and continued gradual consolidation. The lack of sustained debt reduction is likely to increase the risks to the rating if India faces a future economic and fiscal shock.