Fitch Ratings has lowered its 2023-24 GDP growth forecast for India to 6% from 6.2%, citing headwinds from elevated inflation and interest rates along with subdued global demand, with the economy expected to rebound to 6.7% in 2024-25 as opposed to 6.9% projected earlier.
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The rating firm has also re-affirmed India’s long-term foreign-currency issuer default rating at ‘BBB-’ with a stable outlook. A ‘BBB’ issuer default rating indicates that expectations of default risk are currently low and payment capacity to meet financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
While India will be one of the fastest-growing sovereigns rated by Fitch, bolstered by “resilient investment prospects”, the firm said this year’s growth will be slower than the 7% expected in 2022-23, as pent-up domestic demand induced by the pandemic will fade along with faltering global demand.
“We forecast headline inflation to decline, but remain near the upper end of the Reserve Bank of India’s 2%-6% target band, averaging 5.8% in FY24 from 6.7% last year. Core inflation pressure appears to be abating, falling to 5.7% in March, its lowest since July 2021,” it noted.
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Growth prospects have brightened as the private sector appears poised for stronger investment growth with corporate and bank balance sheets improving in the past few years. However, Fitch noted that risks still remain due to the country’s low labour force participation rates and an uneven reform implementation record.
“India’s large domestic market makes it an attractive destination for foreign firms. However, it is unclear whether India 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,” the rating agency pointed out.
Current account deficit
Fitch also slashed its 2022-23 current account deficit projection for India to 2.3% of GDP from 3.3% in December 2022, and expects the deficit to narrow further to 1.9% deficit this year. “The improvement is driven by robust services exports and buoyant remittances, combined with a moderating goods deficit from declining oil prices,” it reasoned.
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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, Fitch said. However, it added that these strengths are offset by 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.
Although Fitch said it expects the central government to meet its fiscal deficit target of 5.9% of GDP in 2023-24 from 6.4% last year, States’ deficits are likely to rise from 2.7% of GDP estimated in 2022-23 to 2.8% of GDP. “We expect the general government deficit (excluding divestments) to narrow to a still-high 8.8% of GDP in 2023-24 from 9.2% in 2022-23,” it said.
Over the medium term, the rating firm said it will be challenging for the Centre to achieve its fiscal deficit target of 4.5% of GDP by 2025-26 as it requires an “accelerated consolidation” of 0.7 percentage points annually over the next two years. For context, the deficit is expected to moderate just 0.3 and 0.5 percentage points, over 2022-23 and 2023-24, respectively.
“Future deficit reduction is likely to come mainly from trimming expenditure, in our view,” it said, adding that India’s general government debt remains elevated at 82.8% of GDP in 2022-23 and is likely to remain around 83% of GDP even in 2027-28. “The lack of sustained debt reduction is likely to increase risks to the rating if India faces a future economic and fiscal shock,” Fitch Ratings concluded.
