India's robust growth outlook, resilient external finances, higher gross domestic product (GDP) growth, improving financial sector and other factors enabled Fitch Ratings to affirm the country's Long Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.
According to Fitch, India's rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year.
These are offset by India's weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita.
The credit rating agency said it forecast India to be one of the fastest-growing sovereigns globally at 6% in the fiscal year ending March 2024 (FY24), supported by resilient investment prospects.
Still, headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand, will slow growth from our FY23 estimate of 7.0 per cent before rebounding to 6.7 per cent by FY25.
"Strong growth potential is a key supporting factor for the sovereign rating. Growth prospects have brightened as the private sector appears poised for stronger investment growth following the improvement of corporate and bank balance sheets in the past few years, supported by the government's infrastructure drive. Still, risks remain given low labour force participation rates and an uneven reform implementation record," Fitch Ratings said.
Pointing at India's large domestic market as an attractive destination for foreign firms Fitch said, it is unclear whether the country will be able to realise sufficient reforms to allow the economy to benefit substantially from opportunities offered by the deeper integration in global manufacturing supply chains, including China+1 corporate strategies that encourage diversification in investment destinations.
Service sector exports, however, are likely to remain a bright spot.
On inflation Fitch forecasts the headline inflation to decline, but remain near the upper end of the Reserve Bank of India's 2 per cent-6 per cent target band, averaging 5.8 per cent in FY24 from 6.7 per cent last year.
Core inflation pressure appears to be abating, falling to 5.7 per cent in March, its lowest since July 2021.
Fitch expects the general government deficit (excluding divestments) to narrow to a still-high 8.8 per cent of the GDP in FY24 (2023 BBB median: 3.6 per cent) from 9.2 per cent in FY23.
"We expect the central government (CG) to meet its budget's planned reduction in the CG deficit to 5.9 per cent of GDP in FY24 from 6.4 per cent in FY23. The budget proposal boosts capex to 3.3 per cent of GDP from 2.7 per cent in FY23, offset by a cut in subsidy spending, notably in the year before the 2024 national election. Aggregate state deficits are forecast to rise slightly to 2.8 per cent of the GDP in FY24 from our 2.7 per cent estimate in FY23, as they also raise capex," Fitch said.
Fitch said India's debt to remain broadly stable at around 83 per cent of GDP in FY28, with an assumption of robust nominal growth of around 10.5 per cent and continued gradual consolidation.
The lack of sustained debt reduction is likely to increase risks to the rating if India faces a future economic and fiscal shock.
A high government interest payment/revenue ratio of around 27 per cent in FY23 (BBB median: 7 per cent) is a growing structural fiscal weakness.
On the other hand, India's public finance risks are mitigated in part by limited reliance on external financing, Fitch said.
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