Fitch Affirms India At 'BBB-', Outlook Stable

Fitch Ratings has affirmed India at 'BBB-', with a stable outlook.

India's rating is underpinned by a robust medium-term GDP growth outlook and sound external finances, which remain intact as the country has navigated a fraught external environment in the past few years, according to a press release issued by the ratings agency on Tuesday.

Weak public finances—illustrated by a high deficit, debt and interest/revenue ratio as compared with peers—continue to be the largest constraint for the rating, it said. Lagging structural metrics, including World Bank governance indicators and GDP per capita, also weighed on the rating, according to the release.

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, the ratings agency said.

It forecasts India's GDP growth at 6.9% in FY24, as compared with a previous forecast of 6% in May 2023. In FY25, GDP growth is estimated to ease to 6.5%.

Investment is likely to remain a key growth driver, as the government's capex drive is likely to continue and private investment should accelerate gradually, it said. Consumption is likely to moderate further in the near term due to reduced household savings buffers.

India's potential GDP growth is estimated at 6.2%, underpinned by the government's infrastructure drive, a solid private investment outlook and favourable demographics, according to the ratings agency. The improved health of bank and corporate balance sheets should pave the way for a positive investment cycle, it said.

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

The ratings agency forecasts headline inflation to ease towards 4.7% by the end of 2024 from 5.7% in December 2023. "Under this inflation outlook, we see the RBI cutting its policy rate by 75 bps in FY25."

The ratings agency expects the government to be able to meet its fiscal deficit target of 5.9% of the GDP in FY24, though the general government fiscal deficit will remain elevated at 8.6% of GDP in FY24, it said. Beyond FY24, there is less certainty on the fiscal path and trade-offs between economic growth and consolidation may become more acute, according to Fitch Ratings.

"We forecast the general government deficit to narrow further to 8.1% of GDP in FY25, based on a central government deficit of 5.4%," the release said.

The central government's medium-term fiscal guidance is for 4.5% of the GDP deficit by FY26, but details on how this will be achieved are still limited, it added. While the government has demonstrated a recent commitment to meeting fiscal targets, reaching this target will require more than 0.3 percentage points and 0.5 percentage points in deficit reduction in FY23 and FY24, respectively, the ratings agency said.

Sustaining high levels of capex is likely to remain a key objective to foster GDP growth, but in the absence of further sizeable revenue-raising measures, spending cuts are likely to be the key driver for narrowing the deficit, the note said.

General government debt, too, is likely to remain high at 82.7% of GDP in FY24, as compared with 56% for similarly rated peers, the ratings agency said. "This is higher than the 81% at FYE23, as nominal GDP growth slowed," the note said.

Polls indicate that the incumbent government will be reelected, it said. "As a result, we expect policy continuity, with gradual fiscal consolidation and economic reform momentum."