Fitch Ratings, a worldwide credit rating agency, has maintained India’s long-term foreign-currency IDR at ‘BBB-‘ with a stable outlook. Despite concerns about weak public finances and lagging structural indicators, the rating agency cited India’s healthy growth forecast and resilient external finances as major reasons in its conclusion.
The key rating drivers of Fitch Ratings’ Assessment
Robust Growth, Weak Fiscals
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. 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.
High GDP Growth amid Headwinds
Fitch Ratings forecasts India to be one of the fastest-growing Fitch-rated sovereigns globally at 6% in the fiscal year ending March 2024 (FY24), supported by resilient investment prospects. 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% before rebounding to 6.7% by FY25.
Robust Medium-Term Outlook
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 following the improvement of corporate and bank balance sheets in the past few years, supported by the government’s infrastructure drive. Still, risks remain given low labour force participation rates and an uneven reform implementation record.
Improving Financial Sector
Sustained improvements in asset quality and profitability have led to a strengthening of bank balance sheets on the back of the economic recovery. This has created headroom to absorb risks as pandemic-related forbearance measures continue to unwind in FY24. Banks appear well-positioned to support sustained credit growth if capitalization is well-managed.
Modest Deficit Reduction
Fitch Ratings expects the general government deficit (excluding divestments) to narrow to a still-high 8.8% of GDP in FY24 (2023 BBB median: 3.6%) from 9.2% in FY23. We expect the central government (CG) to meet its budget’s planned reduction in the CG deficit to 5.9% of GDP in FY24 from 6.4% in FY23. Aggregate state deficits are forecast to rise slightly to 2.8% of GDP in FY24 from our 2.7% estimate in FY23, as they also raise capex.
Challenging Consolidation Path
The government’s medium-term fiscal guidance retains its CG deficit target of 4.5% of GDP by FY26, but provided limited details on how this would be reached. The government has demonstrated a recent commitment to meeting its budget targets. However, we believe it will be challenging to achieve this target, which would require accelerated consolidation of 0.7pp per year in FY25 and FY26, compared with 0.3pp in FY23 and 0.5pp in FY24. Future deficit reduction is likely to come mainly from trimming expenditure, in our view.
High Public Debt Burden
India’s general government debt remains elevated at Fitch’s estimate of 82.8% in FY23 relative to the ‘BBB’ median of 55.4%. Under Fitch Ratings’ debt dynamics, debt is affordability and energy security concerns. India has committed to achieving 450GW of renewable energy capacity by 2030, and progress towards this goal will be important to mitigate environmental risks.
Overall, while India’s rating is supported by strong growth prospects and resilient external finances, its weak public finances and lagging structural indicators pose risks to the rating. The government’s commitment to fiscal consolidation and structural reforms will be critical to address these weaknesses and maintain investor confidence.
Fitch Ratings’ Assessment – Best/Worst Case Rating Scenario
The credit ratings of Sovereigns, Public Finance, and Infrastructure issuers on an international scale have a potential rating upgrade scenario that is considered the best-case, with a maximum improvement of three notches over a three-year rating horizon.
Conversely, there is a worst-case scenario where the rating could be downgraded by three notches over three years, which is measured in a negative direction. The credit rating categories range from ‘AAA’ to ‘D’ and the range of possible scenarios includes both the best and worst-case scenarios. These scenarios are based on past performance records.
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