New Delhi: India is expected to be one of the fastest-growing economies in the world, buoyed by a robust growth outlook, and resilient external finances and investment prospects, Fitch Ratings has said in its latest ratings actions on India.
The ratings agency late Monday evening announced that it had left unchanged its rating of ‘BBB-’ for India and has retained its stable outlook for the economy.
Fitch’s ratings range between ‘AAA’, which denotes the highest credit quality and the lowest default risk, to ‘D’, which indicates a sovereign is in default. A rating category of ‘BBB’ indicates a good credit rating, with adequate capacity for repayment of loans, but that adverse business or economic conditions are more likely to impair this capacity to repay.
While listing out several positives for the economy, the agency also did highlight some risks such as weak public finances as compared to India’s peers, as well as “lagging structural indicators”.
Fitch also said that India’s fiscal consolidation path looked challenging with the government not having indicated any clear plans on how it would bring down its fiscal deficit to target levels.
“India’s rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year,” Fitch said in its note.
“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,” it added.
The agency said that it forecasts India will grow at 6 per cent in the financial year 2023-24, which would make it “one of the fastest-growing” economies rated by Fitch.
“Still, headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand, will slow growth from our FY23 estimate of 7.0 per cent before rebounding to 6.7 per cent by FY25,” it added.
Some positives but unclear reform momentum
According to Fitch, medium-term growth prospects have improved in India with the private sector looking poised for stronger investment on the basis of stronger corporate and bank balance sheets over the past few years.
That said, the ratings agency pointed towards a low labour force participation rate and an uneven reform implementation record.
“India’s large domestic market makes it an attractive destination for foreign firms,” it said. “However, it is unclear whether India will be able to realise sufficient reforms to allow the economy to benefit substantially from opportunities offered by the deeper integration in global manufacturing supply chains, including China+1 corporate strategies that encourage diversification in investment destinations.”
However, service sector exports, which were buoyant throughout the last financial year, are expected to remain a bright spot.
Other positives, Fitch said, include the sustained improvement in asset quality and profitability of banks, as well as signs that inflation, including the persistently-high core inflation, is easing.
“We forecast headline inflation to decline, but remain near the upper end of the Reserve Bank of India’s 2-6 per cent target band, averaging 5.8 per cent in FY24 from 6.7 per cent last year,” Fitch said. “Core inflation pressure appears to be abating, falling to 5.7 per cent in March, its lowest since July 2021.”
Challenging fiscal consolidation path
Fitch has been less sanguine about the government’s fiscal deficit plans for the near future, saying that they would be “challenging” to adhere to. However, it does say that India will meet its fiscal deficit target of 5.9 per cent of GDP in FY24, down from 6.4 per cent in FY23
“The government’s medium-term fiscal guidance retains its central government 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 a recent commitment to meeting its budget targets,” it added. “However, we believe it will be challenging to achieve this target, which would require accelerated consolidation of 0.7 pp (percentage points) per year in FY25 and FY26, compared with 0.3 pp in FY23 and 0.5 pp in FY24.”
In its view, said Fitch, future deficit reduction would likely come mainly from trimming expenditure.
(Edited by Zinnia Ray Chaudhuri)
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