New Delhi: Fitch Ratings in its latest rating actions on India has said that India is expected to be one of the fastest growing economies in the world, buoyed by a strong growth outlook and flexible external finance and investment prospects.
The rating agency late on Monday announced that it has not changed its ‘BBB-‘ rating for India and retained its stable outlook on the economy.
Fitch’s ratings range between ‘AAA’, indicating the highest credit quality, and the lowest default risk, which is ‘D’, which indicates the sovereign is in default. A rating category of ‘BBB’ indicates a good credit rating with adequate ability to repay the loan, but adverse business or economic conditions are likely to reduce this ability.
Listing several positives for the economy, the agency also highlighted some risks such as “lagging structural indicators” along with India’s weak public finances compared to its counterparts.
Fitch also said that India’s fiscal consolidation path looked challenging as the government had not revealed a clear plan on how it would reduce its fiscal deficit to the targeted level.
“India’s ratings reflect strength from a strong growth outlook relative to peers and resilient external finance, which have supported India in weathering major external shocks over the past year,” Fitch said in its note.
It added, “These are offset by India’s weak public finances, characterized by high deficits and debt relative to peers, as well as lagging structural indicators including World Bank governance indicators and GDP per capita.”
The agency said it expects India to grow at 6 per cent in fiscal 2023-24, making it one of the “fastest growing” economies by Fitch.
“Nevertheless, growth from our FY23 estimate of 7.0 per cent, before rebounding to 6.7 per cent by FY20, due to pandemic-induced pent-up demand along with higher inflation, higher interest rates and a fall in global demand Will be slow.” ,
Some positive but unclear recovery momentum
According to Fitch, India’s medium-term growth prospects have improved over the past few years with the private sector gearing up for strong investments on the back of strong corporate and bank balance sheets.
That said, the ratings agency pointed to a low labor force participation rate and uneven reform implementation record.
“India’s large domestic market makes it an attractive destination for foreign firms,” it said. “However, it is unclear whether India will be able to realize sufficient reforms to allow it to benefit substantially from the opportunities offered by deeper integration into global manufacturing supply chains, including China+1 corporate strategies that are investment destinations. encourage diversification.
However, services sector exports, which grew rapidly during the last fiscal, are expected to remain the bright spot.
Other positives, Fitch said, included continued improvement in asset quality and profitability of banks, as well as signs that inflation, including persistently high core inflation, is easing.
“We anticipate a decline in headline inflation but remain near the upper end of the Reserve Bank of India’s 2-6 per cent target band, averaging 5.8 per cent in FY24 from 6.7 per cent last year,” Fitch said. “Coin inflation pressures appear to be easing, falling to 5.7 per cent in March, the lowest since July 2021.”
Challenging Fiscal Consolidation Path
Fitch has been less optimistic about the government’s fiscal deficit plans for the near future, saying they will be “challenging” to adhere to. However, it says that India will meet its fiscal deficit target of 5.9 per cent of GDP in FY24, down from 6.4 per cent in FY23.
“The government’s medium-term fiscal guidance retains its central government deficit target of 4.5 per cent of GDP by FY26, but provides limited detail on how this will be reached,” Fitch said.
It added, “The government has demonstrated recent commitment to meeting its budget targets.” “However, we believe that achieving this target will be challenging, requiring accelerated consolidation of 0.7 pp (percentage points) per year in FY25 and FY26, compared to 0.3 pp in FY23 and 0.5 pp in FY24.”
In its view, Fitch said, future deficit reduction will come primarily from trimming spending.
(Editing by Zinnia Ray Chowdhury)