Fitch affirms India’s rating at ‘BBB-’

Relying on a robust medium-term GDP growth outlook and sound external finances, Fitch has affirmed India’s sovereign rating at ‘BBB-’ with stable outlook.

‘BBB-’ is last investment grade and stable outlook means it can upgraded to a notch above provided economic situations improve from here. Foreign investors rely on such rating before deciding about putting money in a country.

“India is poised to remain one of the fastest-growing countries globally in the next few years as the robust economic momentum is proving resilient. We forecast GDP growth of 6.9 per cent in the fiscal year ending March 2024 (FY24), well above our 6 per cent FY24 forecast from our last review in May 2023, before easing to 6.5 per cent in FY25,” the rating agency said in a statement. While the government expects growth rate during current fiscal at 7.4 per cent, RBI has estimated 7 per cent growth. Many agencies forecasted growth rate between 6.3 per cent and 7 per cent.

According to Fitch, investment is likely to remain a key growth driver, as the government’s capex drive is likely to continue and private investment will accelerate gradually. Consumption is likely to moderate further in the near term due to reduced household savings buffers. Recently released national accounting data also showed that while the expenditure by the government has been rising, consumption has weekend.

The agency estimated India’s potential GDP growth at 6.2 per cent, underpinned by the government’s infrastructure drive, a solid private investment outlook and favourable demographics. The improved health of banks and corporate balance sheets should pave the way for a positive investment cycle, the agency said.

“Sustained reforms could support and boost growth prospects, but risks may arise from an uneven implementation record. Labour market weakness, partly reflected in low female participation, also poses a risk to the outlook,” it said.

After revision in nominal growth forecast for FY24, various agencies said that fiscal deficit could exceed budget estimate. In contrary, Fitch forecasted that the general government (Centre + States together) fiscal deficit will remain elevated, at 8.6 per cent of GDP in FY24 from 9.2 per cent in FY23.

“We expect the central government to achieve its 5.9 per cent of GDP FY24 deficit target from 6.4 per cent in FY23,” it said.

Listing the reasons for meeting the deficit target, the agency said that revenue collection was buoyant as the 2016 goods and services tax reform matures. Expenditure quality has improved as capex is largely in line with the budget’s ambitious plans.

“Subsidy and income support spending has risen beyond budget expectations, but we expect spending to be managed to meet the target, even in an election year, “ it said.

However, the agency cautioned that beyond FY24 there is less certainty on the fiscal path and trade-offs between economic growth and consolidation may become more acute.

“We forecast the GG (general government) deficit to narrow further to 8.1 per cent of GDP in FY25, based on a CG (central government) deficit of 5.4 per cent. The CG will present an interim FY25 budget on 1 February 2024 before the national election, but additional policy announcements will be in the post-election budget in mid-2024. “We expect the aggregate State deficit to remain around 2.8 per cent of GDP,” it said.

The agency, relying on surveys, believed that incumbent government led by the Bharatiya Janata Party under Prime Minister Narendra Modi will be re-elected, even as much of the opposition has coalesced under a broad coalition. “As a result, we expect policy continuity, with gradual fiscal consolidation and economic reform momentum,” it said.

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