Fitch Ratings affirmed India’s sovereign rating at ‘BBB-’, the lowest investment grade and just a notch above ‘junk’ status, and kept the outlook Stable.
The affirmation balances strong GDP growth outlook and favourable external finances with the high government debt burden and difficult-but-improving business environment, Fitch said in a statement on Monday.
It said that India’s sovereign ratings continue to be constrained by limited improvement in the fiscal position, but also pointed out that the positive GDP growth outlook stands out globally.
It forecast real GDP growth to accelerate to 7.5 per cent in the current financial year, followed by 8 per cent in 2016-17. The pick-up in growth, it said, will be largely driven by support from the government’s “beefed-up capex spending and gradual implementation of a broad-based structural reform agenda”.
Real growth averaged 6.7 per cent over the past five years, which is considerably higher than the ‘BBB’ range median of 3.0 per cent, it said.
The government continues to steadily roll out its “ambitious structural reform agenda”, as illustrated in recent months by the announcement of new reforms that will likely improve the business environment including changes in the foreign direct investment regime, Fitch said. Still, “translation of structural reforms into improved indicators and higher real GDP growth depends on actual implementation”, it noted.
India moved up four places in the World Bank’s Ease of Doing Business rankings, but is still the worst-performing of all ‘BBB’ range sovereigns at 130th out of 189 countries, the rating agency pointed out.
Raising doubts over the feasibility of the medium-term fiscal consolidation path without any new revenue-generating measures in wake of the seventh Pay Commission’s recommendation of a 23.6 per cent increase in remuneration for central government employees, it projected centre-plus-states’ fiscal deficit in the current financial year, will be more than double the 'BBB' peer median of 2.8 per cent.
It also cautioned that the centre-plus-states’ debt burden could rise to 68.8 per cent of GDP, one of the highest of ‘BBB’ range sovereigns and far off the ‘BBB’ category median of 42.8 per cent of GDP. The increase largely results from state governments taking part of the power distribution companies’ debt onto their own balance sheets, following the Government’s Uday initiative, said Fitch.
India is not immune to external shocks, but seems less vulnerable than many of its peers, it said. India is also less vulnerable than many peers to a potential severe slowdown in China, as bilateral trade between the two countries is limited and India’s more domestically-based economy is not part of the Asian supply chain.
