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India’s Fitch Ratings’ Assessment is at ‘BBB-‘ as Growth Potential Fights High Deficit Concerns

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.

Fitch Ratings’ Assessment – FAQs

Q1: What are the key rating drivers of Fitch Ratings’ assessment of India’s sovereign rating?

Ans: The primary rating drivers are India’s solid growth prospects in comparison to peers, as well as its resilient external finances, which have helped India navigate large external shocks over the past year. These are mitigated by India’s poor public finances, as evidenced by significant deficits and debt in comparison to peers, as well as lagging structural measures such as World Bank governance indexes and GDP per capita.

Q2: What is Fitch Ratings’ forecast for India’s GDP growth in the fiscal year ending March 2024?

Ans: Fitch Ratings expects India to be one of the fastest-growing Fitch-rated sovereigns in the world, with a 6% growth rate in the fiscal year ending March 2024 (FY24), thanks to solid investment prospects.

Q3: What is Fitch Ratings’ assessment of India’s financial sector?

Ans: According to Fitch Ratings, ongoing improvements in asset quality and profitability are leading to a strengthening of bank balance sheets as the economy recovers. This has allowed headroom for risk absorption when pandemic-related forbearance measures wind down in FY24. If capitalization is well-managed, banks look to be well-positioned to support prolonged lending growth.

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  • Priti Palit, an accomplished edtech writer, boasts a wealth of experience in preparing candidates for multiple government exams. With a passion for education and a keen eye for detail, she has contributed significantly to the field of online learning. Priti's expertise and dedication continue to empower aspiring individuals in their pursuit of success in government examinations.

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