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Informist, Thursday, Aug 29, 2024

 

MUMBAI – Fitch Ratings today affirmed India's long-term foreign-currency issuer default rating at 'BBB-' with a stable outlook. "India's ratings are underpinned by its strong medium-term growth outlook, which will continue to drive improvement in structural aspects of its credit profile, including India's share of GDP in the global economy, as well as its solid external finance position," the global rating said in a release.

 

The strengthening fiscal credibility from recent achievement of deficit targets, enhanced transparency and buoyant revenues, have increased the likelihood that government debt could follow a modest downward trend in the medium term, Fitch said. The Union Budget in July lowered the fiscal deficit target for the current financial year ending March to 4.9% of GDP from 5.1% of GDP pegged in the Interim Budget.

 

However, with fiscal deficits, debt and debt service burden remaining higher compared with 'BBB' range peers, India's fiscal metrics remain a credit weakness, it said. "Lagging structural metrics, including governance indicators and GDP per capita, also weigh on the rating," the rating agency said. 

 

Fitch sees India's fiscal deficit reaching 4.9% of GDP in 2024-25, in line with the Budget projection, from a better-than-expected 5.6% in 2023-24. "Fiscal consolidation by the central government is advancing more quickly than we expected, even as capex remains high, signalling the commitment to reduce deficits." The improved outcomes reflect buoyant revenues, including a larger-than-budgeted Reserve Bank of India dividend and contained social spending, notably during an election year, it said.

 

Fitch said it expected the central government to achieve the fiscal consolidation target of below 4.5% of GDP by 2025-26, which was set in the Budget for 2021-22. Fitch expects the fiscal deficit to be 4.4% of GDP in 2025-26. "After FY26 (2025-26) we forecast a steady deficit reduction of 0.2% of GDP per year to about 3.8% in FY29 (2028-29), assuming sustained strong revenue growth and a slight reduction in capex spending," Fitch said.

 

The rating agency sees the general government deficit to fall to 7.3% of GDP in 2025-26 and 6.6% by 2028-29, based on aggregate state deficits of 2.8%. 

 

On India's GDP growth, the rating agency said it expects the economy to grow 7.2% in the current fiscal year and 6.5% next year, down slightly from 8.2% in 2023-24. The public infrastructure capex remains a key driver for India's growth and the improved spending quality is helping mitigate the drag from fiscal consolidation, it said.

 

Fitch projected India's potential GDP growth to be at 6.2%, underpinned by the infrastructure push, strong services sector and solid private investment outlook. 

The rating agency said the improved health of the bank and corporate balance sheets in recent years should pave the way for a positive investment cycle. "Private investment in real estate is likely to remain strong and there are signs of a nascent pick-up in manufacturing investment," Fitch said.   

 

"A key risk is if this private investment cycle does not materialise as a result of subdued consumption, which would weigh on job creation and dampen potential benefits from India's demographic dividend." 

 

With the coalition led by the Bharatiya Janata Party winning a third consecutive term at the Centre, the government's policy continuity around the infrastructure drive, digitalisation and ease of doing business measures will support growth, Fitch said. However, coalition politics and a weakened mandate may constrain the government's ability to enact major economic reforms, limiting the upside to potential growth. However, state governments are likely to advance reforms around land and labour steadily, it said.

 

Fitch projected India's public debt to fall to 81.6% of GDP in 2024-25 from an estimated 82.4% in 2023-24 and reach just under 78% of GDP by 2028-29, assuming a trend nominal growth of 10.5%. "The debt trajectory remains highly sensitive to growth outcomes and clear risks to this path remain, particularly if nominal growth slips below double digits or if consolidation efforts stall," Fitch said.

 

"New medium-term fiscal objectives have yet to be fully defined, but the recent Budget highlighted the intention to sustain debt on a downward path. Further clarity on medium-term fiscal objectives will be critical to assessing the sustained commitment to more prudent fiscal management," it said.

 

Fitch projected the government's interest/revenue ratio to decline slightly to 23.4% by 2026-27 from around 25% now. The interest/revenue ratio remains elevated, well above the 9% 'BBB' median, and is likely to remain a key weakness in India's credit profile for some time, Fitch said.

 

India's external finances remain a rating strength, underpinned by high foreign exchange reserves, a net external creditor position, and a low current account deficit, Fitch said. India's foreign exchange reserves have risen by around $47 bln in the current calendar year to $670 bln as of Aug 9, which is almost equivalent to eight months of current external payments. Fitch expects a further rise in foreign exchange reserves in the coming years.

 

Fitch projected India's current account deficit at around 1.0% of GDP over the next three years from 0.7% in 2023-24. "India's comparative advantage in services will continue to boost exports and offer a buffer against commodity price shocks," it said.

 

Persistent food inflation has kept headline inflation in India above the mid-point of the Reserve Bank of India's 2-6% target range for most of 2024-25, Fitch said, adding that the solid monsoon rainfall should keep food prices contained. The rating agency has projected India's average inflation at 4.6% in 2024-25 and 4.4% in 2025-26.

 

Easing inflation should drive modest policy rate cuts of 25 basis points in both 2024-25 and 2025-26. Risks are tilted towards fewer cuts, given the Reserve Bank of India's hawkish focus on persistent food inflation, Fitch said.  End

 

Reported by Richard Fargose

Edited by Saji George Titus

 

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