Fitch, the global ratings agency, has reiterated its BBB- rating on India’s long-term sovereign debt, maintaining a stable outlook. Fitch believes that the growth prospects have improved as the private sector is expected to experience stronger investment growth.
This positive development is attributed to the improvement in corporate and bank balance sheets over the past few years, supported by the government’s infrastructure drive.
On Monday, Fitch stated that India would be one of the fastest-growing sovereigns globally, with a projected GDP growth of 6% for FY24, driven by resilient investment prospects. However, Fitch identified several challenges such as elevated inflation, high interest rates, subdued global demand, and fading pandemic-induced pent-up demand.
Although Fitch’s GDP forecast for FY24 is lower than other agencies, like the Asian Development Bank and the World Bank, it is higher than that of the International Monetary Fund.
Fitch stated, “India’s rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year.” However, it also highlighted India’s weak public finances, characterized by high deficits and debt relative to peers, as well as lagging structural indicators such as World Bank governance indicators and GDP per capita. Fitch expects growth to rebound to 6.7% by FY25.
The report also emphasized the healthy position of the financial sector, stating that sustained improvements in asset quality and profitability have strengthened bank balance sheets in line with economic recovery. This has provided banks with the capacity to absorb risks as pandemic-related forbearance measures continue to unwind in FY24. Additionally, banks are well-positioned to support sustained credit growth if capitalization is effectively managed.
Fitch expects inflation to decline but remain near the upper end of the Reserve Bank of India’s target band, with an average of 5.8% in FY24 compared to 6.7% last year.
The agency noted that while the government is committed to achieving a fiscal deficit target of 4.5% of GDP by FY26, there is no clear plan on how this will be accomplished.
Fitch stated, “We believe it will be challenging to achieve this target, which would require accelerated consolidation of 0.7 percentage points per year in FY25 and FY26 compared with 0.3 bps in FY23 and 0.5 bps in FY24. Future deficit reduction is likely to come mainly from trimming expenditure, in our view.”
Fitch also revised its estimate of the FY23 current account deficit to 2.3% of GDP from 3.3% and forecasts a 1.9% deficit in FY24.
“Fitch attributes this improvement to robust services exports and buoyant remittances, along with a moderating goods deficit resulting from declining oil prices. Services exports have flourished as domestic technology firms have moved up the value chain, and multinationals have outsourced back-office operations to India amid tight labor markets globally,” the agency stated.