Global agency Fitch Ratings has affirmed India’s rating at ‘BBB-’ with a Negative Outlook. This is investment grade rating, though the last one.

It said that the rating balances a still-strong medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural issues. The country’s rapid economic recovery from the Covid-19 pandemic and easing financial sector pressures are narrowing risks to the medium-term growth outlook. However, “the negative outlook on the rating reflects lingering uncertainty around the medium-term debt trajectory, particularly given India’s limited fiscal headroom relative to rating peers,” the agency said.

It forecasted GDP growth of 8.7 per cent in the fiscal year ending March 2022 (FY22) and 10 per cent in FY23, supported by the resilience of India’s economy, which has facilitated a swift cyclical recovery from the Delta Covid-19 variant wave in 2Q21.

It mentioned that India’s strong medium-term growth outlook relative to peers is a key supporting factor for the rating and an important driver of our current baseline of a modestly declining public debt trajectory. “We forecast growth of around 7 per cent between FY24 and FY26, supported by the government’s reform agenda and the closing of the negative output resulting from the pandemic shock,” it said.

Betting on reforms

The agency highlighted various reforms initiatives. It said the government’s production-linked incentive scheme to boost foreign direct investment, labour reform and the creation of a ‘bad bank’, along with an infrastructure investment drive and the National Monetisation Pipeline, should support the growth outlook if fully implemented. Nevertheless, “there are challenges to this outlook, given the uneven nature of the economic recovery and reform implementation risks,” it said.

It also mentioned that fiscal metrics are also showing signs of improvement and we forecast the general government deficit to narrow to 10.6 per cent of GDP in FY22, from 13.6 per cent in FY21. This is consistent with an FY22 central government deficit of 6.9 per cent of GDP, excluding divestment receipts. “Per the government’s deficit definition, including divestment, this would be 6.6 per cent of GDP, which is slightly below the budget target,” it said.

The agency explained that strong revenue growth, particularly from GST collections, is facilitating the government to stay within its budget parameters, despite modest additional spending pressure from the second pandemic wave. “We forecast interest payments/revenue to reach 28.2 per cent in FY22 which will limit the sovereign’s fiscal flexibility.

The government has laid out a broad plan for fiscal consolidation over the medium term, with a central government deficit target of 4.5 per cent of GDP by FY26. This would be consistent with a general government deficit of 7.5 per cent of GDP,” it said.

comment COMMENT NOW