Fitch Ratings on Friday kept its sovereign rating for India unchanged at the lowest investment grade of BBB-, with a stable outlook, having denied the country an upgrade for 12 years now.
The global rating agency cited “weak” fiscal position and “some lagging structural factors, including governance standards and a still-difficult, but improving, business environment” for the status quo. However, it has acknowledged India’s strong medium-term growth outlook and favourable external balance. Last month, the finance ministry had pitched for a rating upgrade with Fitch officials.
Fitch joins Standard and Poor’s 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 last year – for the first time in around 14 years, as it expected continued progress on economic and institutional reform would boost India’s high growth potential.
“Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings. General government debt amounted to 69% of GDP in FY18, while fiscal slippage of 0.3% of GDP in both FY18 and FY19 relative to the government’s own budget targets of last year, implies a general government deficit of 7.1% of GDP,” Fitch said in a statement, which remained in sync with its earlier stance.
The agency said the Centre’s target to gradually trim its own fiscal deficit from 3.5% in FY18 to 3% of the GDP by March 2021 is “well beyond its current electoral term”. It added that the government’s longer-term aim of keeping a ceiling for central government debt at 40% of GDP and general government debt at 60% of GDP (to be reached by March 2025) is a positive step, if eventually adhered to.
India’s relatively strong external buffers and the comparatively closed nature of its economy make it less vulnerable to external shocks vis-a-vis many of its peers. However, falling net FDI inflows at $23.7 billion in the first three quarters of FY18 from $30.6 billion a year earlier are “insufficient” to cover a widening current account deficit, unlike in many of India’s peers, the agency warned.
Fitch said public sector banks could need more capital infusion by the government than $32 billion planned by it, especially after the $2.2- billion fraud at Punjab National Bank. “Most of the capital injection is likely to be absorbed by losses associated with NPL (non-performing loan) resolution, rather than to fund new lending. Fitch expects the sector-wide NPL ratio to rise to 11.5% of total loans by end-FY18, up from 4.6% in FY15, due mainly to stricter implementation of standards,” it said.