Fitch affirms 'BBB-' rating to India with 'stable' outlook

Fitch Ratings has affirmed India's long-term foreign-currency issuer default rating (IDR) at 'BBB-', citing robust growth outlook compared with peers and resilient external finances, which have supported the country in navigating the large external shocks over the past year. The American credit ratings agency has also assigned ‘stable’ outlook, saying that “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,” Fitch said in a report released on May 8.

Fitch, however, said 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, remain key concerns that may lead to negative rating in the future.

The agency sees 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. The growth projection for FY23 has been pegged at 7% before rebounding to 6.7% by FY25 in the backdrop of headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand.

The report highlighted India's large domestic market makes it an attractive destination for foreign firms. “However, it is unclear whether India will be able to realise sufficient reforms to allow the economy to benefit substantially from opportunities offered by the deeper integration in global manufacturing supply chains, including China+1 corporate strategies that encourage diversification in investment destinations. Service sector exports, however, are likely to remain a bright spot.”

The agency expects headline inflation to decline, but remains near the upper end of the Reserve Bank of India's 2%-6% target band, averaging 5.8% in FY24 from 6.7% last year. “Core inflation pressure appears to be abating, falling to 5.7% in March, its lowest since July 2021,” the report noted.

According to Fitch, India's general government debt remains elevated at 82.8% in FY23 relative to the 'BBB' median of 55.4%. The agency expects debt to remain broadly stable at around 83% of GDP in FY28, with an assumption of robust nominal growth of around 10.5% and continued gradual consolidation. “The lack of sustained debt reduction is likely to increase risks to the rating if India faces a future economic and fiscal shock,” it said.

Fitch has cut its estimate of the FY23 current account deficit to 2.3% of GDP from 3.3% in its December review and forecast a 1.9% deficit in FY24. This was attributed to robust services exports and buoyant remittances, combined with a moderating goods deficit from declining oil prices. “Services exports have boomed as domestic technology firms have moved up the value chain and multinationals have offshored back-office operations to India amid tight labour markets globally.”

The agency said that the government has retained 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,” it said.