Fitch Ratings on Friday retained its sovereign rating for India at the lowest investment grade of BBB-, with a stable outlook, having denied the country an upgrade for 13 years now.
“A weak fiscal position continues to constrain India’s sovereign ratings. In this regard, the next government’s medium-term fiscal policy will be of particular importance from a rating perspective,” Fitch said in a statement, which remained in sync with its earlier stance.
The upcoming elections (from April 11 to May 19) result in some temporary uncertainty about the policy agenda, Fitch said. However, it acknowledged that over the past 30 years, governments of different political persuasions have been generally reform-minded. The global agency had last upgraded India’s sovereign rating from ‘BB+’ to ‘BBB-‘ with a stable outlook on August 1, 2006.
However, the rating agency added that a robust growth outlook continues to support India’s credit profile. Nevertheless, Fitch expects growth to slow down to 6.8% in FY20 from an estimated 6.9% this fiscal, before picking up to 7.1% in FY21, supported by accommodative monetary policy, an easing of bank regulations, and government spending.
Fitch said although official GDP data suggest growth averaged 7.5% in the five years through FY19, which is more than twice as fast as the historical ‘BBB’ peer median of 3.6%, the country’s general government deficit has hit around 7% of the GDP against the ‘BBB’ median of 1.9% and off-Budget financing has gained in importance. The general government debt, too, increased to 68.8% of the GDP in FY19 from 67.1% five years ago, according to a Fitch estimate, which is much higher than the ‘BBB’ median of 37.5%.
A growth deceleration in recent quarters has mainly been domestically driven, from weak manufacturing performance and low food inflation weighing on farmers’ incomes. Limited available indicators also point to a rise in unemployment, Fitch said.
“India’s ratings balance a strong medium-term growth outlook and relative external resilience stemming from strong foreign reserve buffers, against high public debt, a weak financial sector and some lagging structural factors,” it said.
Fitch joins S&P in retaining India’s rating at BBB–, with a stable outlook. However, Moody’s Investors Service raised its sovereign rating for the country from the lowest investment grade of Baa3 to Baa2, and upgraded the outlook from stable to positive in November 2017 for the first time in around 14 years. This was because Moody’s expected continued progress on economic and institutional reform would boost India’s high growth potential.