India's economic growth will accelerate to 7.3 per cent in the current fiscal and 7.5 per cent in the next as money supply has recovered to its pre-demonetisation level and disruptions related to the rollout of GST have diminished.
Fitch, which last month kept India's sovereign rating unchanged for the 12th year in a row, said the country's ratings "balance a strong medium-term growth outlook and favourable external balances against a weak fiscal position and the difficult business environment".
But the business environment is likely to improve gradually with the implementation and continued broadening of the government's structural reform agenda.
"Fitch expects growth to accelerate to 7.3 per cent in the fiscal year ending March 2019 (FY19), and 7.5 per cent in FY20, from 6.5 per cent in FY18," it said in second quarter Sovereign Credit Overview for Asia Pacific region.
The Indian economy continued to bounce back in the final quarter of 2017, growing 7.2 per cent.
"The influence of one-off, policy-related factors, which had been a drag on growth, has now waned. The money supply recovered to its pre-demonetisation level in mid-2017 and is now increasing steadily, similar to the previous trend. Meanwhile, disruptions related to the rollout of the goods and services tax in July 2017 have gradually diminished," it said.
The BJP-led government's last full budget before general elections has left much of the task of addressing the country's relatively weak public finances to the next government.
The budget deficit target for FY19 is set at 3.3 per cent of GDP, down from an expected 3.5 per cent in FY18, implying fiscal slippage of 0.3 per cent of GDP in both FY18 and FY19 relative to last year's budget targets.
"The government plans to adopt a ceiling of 40 per cent of GDP for central government debt, as recommended by the Fiscal Responsibility and Budget Management Review Committee in January 2017, compared with an estimated 50 per cent of GDP for FY18.
"This would be a positive step towards a more prudent fiscal framework, even if the debt is unlikely to fall below the ceiling by FY23, as recommended by the committee," Fitch said.
It went on to list a reduction in general government debt over the medium term and higher sustained investment and growth rates without the creation of macro imbalances, such as from successful structural reform implementation, as positives.
The negatives included a rise in the public-debt burden, which may be caused by stalling fiscal consolidation or greater-than-Fitch-expected deterioration in the balance sheets of public-sector banks that could prompt large-scale sovereign financial support.
Also, loose macroeconomic policy settings that cause a return of persistently high inflation and widening current-account deficits, which would increase the risk of external funding stress, it added.
