Fitch Ratings/File image/PTI
Fitch Ratings has revised up its outlook on India to stable from negative while affirming the BBB- rating.
“The Outlook revision reflects our view that downside risks to medium-term growth have diminished due to India’s rapid economic recovery and easing financial sector weaknesses, despite near-term headwinds from the global commodity price shock,” Fitch said in a statement on June 10.
“We expect robust growth relative to peers to support credit metrics in line with the current rating,” the rating agency added.
Fitch expects India’s GDP to grow by 7.8 percent in FY23 compared with its median forecast of 3.4 percent for countries it rateds BBB.
The ratings agency had lowered the outlook to negative in June 2020 after the imposition of the draconian nationwide lockdown to contain the spread of the coronavirus. However, the stringent restrictions on movement and economic activity dragged the economy into a technical recession – or two consecutive quarters of year-on-year decline in GDP.
However, growth has since rebounded, albeit due to a favourable base effect. As per the statistics ministry’s first provisional estimate, India’s GDP liekly grew 8.7 percent in FY22, with the Reserve Bank of India (RBI) forecasting growth will decline to 7.2 percent in FY23. As such, Fitch’s forecast is 60 basis points higher than the central bank’s.
However, the agency said its latest growth forecast is 70 basis points lower than what it had forecast in March, with the impact of high global inflation “dampening some of the positive growth momentum”.
In the medium-term, Fitch said India’s growth outlook was “strong” relative to its peers. It expects growth of around 7 percent between FY24 and FY27.
“Nevertheless, there are challenges to this forecast, given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms,” Fitch said.
High debt
The rebound from a 6.6 percent contraction of the economy in FY21 has been key in supporting India’s elevated public debt levels, which have been a key rating weakness. Fitch reiterated this on June 10, saying the country’s public finances “remain a credit weakness”.
“We forecast the debt-to-GDP ratio to drop to 83.0 percent in FY23 from a peak of 87.6 percent in FY21, but it remains high compared to the 56 percent peer median. Beyond FY23, however, our expectations of only a modest narrowing of the fiscal deficit and rising sovereign borrowing costs will push the debt ratio up slightly to around 84.0 percent by FY27, even under an assumption of nominal GDP growth of around 10.5 percent,” Fitch said.
On the fiscal deficit front, Fitch expects the Centre to miss its FY23 target by 40 basis points and hit 6.8 percent of GDP due to the fuel excise duty cuts and increased subsidies announced in May to contain rising prices.
In the medium term, Fitch expressed doubt over the Centre’s ability to lower the fiscal deficit to 4.5 percent given that “little clarity” was given in the 2022 budget on how it would be achieved.
“In our view, achieving this target could prove challenging, particularly as revenue/GDP has already returned to pre-pandemic levels,” Fitch said.
With regards to monetary policy, Fitch sees the RBI raising the repo rate to 6.15 percent by FY24 to fight inflation, which it sees averaging 6.9 percent in FY23 – 20 basis points higher than what the central bank has forecast.
On Fitch’s revised rating for India, Commerce Minister Piyush Goyal today said that the rating is an ”acknowledgement of Modi government’s reforms agenda that has placed the economy on a strong footing, cushioning it from external variables and laying the roadmap for steady growth”.
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