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Fitch retain India's sovereign rating at 'BBB-'; flags deficits, govt debt

The rating agency affirmed India's Long-Term Foreign-Currency Issuer Default Rating at 'BBB-' with a stable outlook
Last Updated : 09 May 2023, 15:27 IST
Last Updated : 09 May 2023, 15:27 IST
Last Updated : 09 May 2023, 15:27 IST
Last Updated : 09 May 2023, 15:27 IST

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Global rating agency Fitch has affirmed India's sovereign rating at 'BBB-', the lowest investment grade, saying the positive impact of the country’s robust economic growth outlook is offset by weak public finances, especially high fiscal deficit, and government debt.

“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 in its rating action commentary.

“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,” it said.

The rating agency affirmed India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a stable outlook. This is the lowest investment grade rating by Fitch.

India’s sovereign ratings by other two leading global agencies, Moody's and Standard & Poor's, are also of the lowest investment grade. Standard & Poor's rating for India stands at BBB-, while Moody's has assigned Baa3 rating. Outlook by all three agencies is stable.

The rating action impacts the country’s borrowing costs.

Fitch said India’s GDP growth is estimated to slow to 6 per cent in the current financial year from 7 per cent growth projected in 2022-23. The economic growth is estimated to rebound to 6.7 per cent in 2024-25. Despite the slowdown in 2023-24, India would remain one of the fastest-growing Fitch-rated sovereigns globally.

“Strong growth potential is a key supporting factor for the sovereign rating,” Fitch Ratings said.

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, it added.

On deficit, Fitch Ratings said, “We expect the general government deficit (excluding divestments) to narrow to a still-high 8.8 per cent of GDP in FY24 (2023 BBB median: 3.6 per cent) from 9.2 per cent in FY23.”

Fitch flagged concerns over the central government’s target to reduce fiscal deficit to 4.5 per cent by 2025-26 as announced by Finance Minister Nirmala Sitharaman in the union budget 2023-24.

“We believe it will be challenging to achieve this target, which would require accelerated consolidation of 0.7pp (percentage points) per year in FY25 and FY26, compared with 0.3pp in FY23 and 0.5pp in FY24. Future deficit reduction is likely to come mainly from trimming expenditure,” Fitch Ratings said.

Fitch also flagged India’s high debt burden. India's general government debt is estimated at 82.8 per cent of GDP in FY23 relative to the 'BBB' median of 55.4 per cent.

“Under our debt dynamics, we forecast 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,” the rating agency said.

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Published 09 May 2023, 04:14 IST

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