Fitch Ratings Gives Economic Reforms A Thumbs Up But Keeps Rating Unchanged

International rating agency Fitch Ratings has kept its sovereign rating on India unchanged, despite a continued pitch from the government for an upgrade. In it's review, the rating agency acknowledged India's strong growth and recent economic reforms but concluded that the state of the government's finances do not justify an upgrade.

In a release issued on Tuesday, Fitch affirmed India's sovereign rating at BBB-, the lowest investment grade rating. The outlook on India's rating remains stable, with the agency saying that upside and downside risks to the sovereign rating are broadly balanced.

The rating agency said that it expects 7.7 percent real gross domestic product (GDP) growth in financial year 2017-18 and 2018-19. The growth rate is significantly higher than the 7.1 percent real GDP growth that India clocked in the financial year ending 31 March, 2017.

Factors that will push up growth include structural reforms, higher real disposable income supported by the implementation of the 7th Pay Commission recommendations, and a strong monsoon.

While announcing the monetary policy statement on April 6, the Reserve Bank of India (RBI) had estimated that gross value added (GVA) growth rate for the current financial year would be at 7.4 percent. GDP and GVA are two different methodologies for measuring growth. GDP takes into account the gross value added after accounting for subsidies and taxes.

In its statement, Fitch took note of the government's reform agenda and said it is closely watching the implementation of the goods and services tax (GST) and the Insolvency and Bankruptcy Code.

"The impact of the reform programme on investment and real GDP growth will depend on how it is implemented and the extent to which the government continues its strong drive to improve the still-weak business environment," the rating agency said.

The government's finances, however, remain a constraint on the country's rating, said the agency. The general government debt stands at 67.9 percent of GDP compared to the median of 40.9 percent for other countries in the BBB rated category. The fiscal deficit at 6.6 percent of GDP is also much higher than the average of 2.7 percent within this category.

Earlier this year, a committee reviewing the Fiscal Responsibility And Budget Management (FRBM) Act had recommended that the government bring down its debt to 60 percent of GDP by 2023.

Fitch Ratings also raised a red flag on the state of India's public sector banks, which, according to the agency, are a ‘contingent liability' on the sovereign.

Fitch expects non-performing loans (NPLs) to rise to 9.7 percent of total loans of the banking system by end-FY17, from 4.6 percent in FY15, due mainly to stricter implementation of standards. The rating agency reiterated that the Rs 70,000 crore set aside by the government for recapitalising state-owned banks is inadequate.

Fitch estimates the banking system, including private sector banks, need capital of around Rs 6 lakh crore ($90 billion or 3.2 percent of GDP in FY19).