Global rating agency Fitch on Monday retained India’s sovereign rating at “BBB-“, the lowest investment grade, with stable outlook.
“The affirmation of India’s sovereign ratings balances a strong medium-term growth outlook and favourable external balances against a weak fiscal position and still-difficult business environment,” it said in statement.
Fitch cautioned that risks to the current rating could arise if the already high public-debt burden worsened further, loose macroeconomic policy lead to persistently high inflation levels and an external funding stress emerged from widening current-account deficit.
It forecast GDP growth to slightly accelerate from 7.6% in FY16 to 7.7% in FY17 and 7.9% in FY18, resulting from an expected pick-up in consumption in both urban and rural areas after a civil-servant wage hike of 24% and the strong likelihood of stronger rainfall than in the previous two poor monsoon years.
At the same time, weak private investment indicated that the economy was still not firing on all cylinders, it said.
Fitch also expected the government’s continued structural reform push to support GDP growth in the medium term. Passage of the new Bankruptcy Code in both houses of parliament in May 2016 showed that big-ticket reforms are possible in India, even though the government’s proposal for a Goods and Services Tax has thus far not passed in the Upper House (Rajya Sabha). Those reforms that only require executive approval continue to be rolled out and some legislative reforms are being pursued at the state level.
A resulting improvement in the business environment is also indicated by swelling foreign direct investment inflows, although India still ranks lowest among sovereigns in the ‘BBB’ category in the World Bank’s Ease of Doing Business index, and this is not likely to change anytime soon, the agency said.
“Weak fiscal balances, India’s Achilles’ heel for years, continue to constrain its ratings,” it said. The central government’s consolidation efforts, illustrated by meeting its deficit target of 3.9% for FY16 and sticking to its 3.5% target for FY17, strengthen its fiscal credibility. Fitch expected general government debt to reach 69.4% of GDP in FY17 and the general government deficit to slightly fall to 6.8% of GDP, which compares unfavourable with ‘BBB’ peer medians of 40.6% and 2.6% respectively.
With NPAs rising, Fitch estimated the banking system needs around $90bn (Rs 6trn, or 4% of GDP in FY17) of capital, while many public-sector banks are likely to find it difficult to access new capital from non-government sources.