NEW DELHI: Fitch Ratings has affirmed India‘s ‘BBB-‘ rating citing strong medium-term growth outlook and favourable external balances. It has a stable outlook on India’s rating that is constrained by a weak fiscal position and still-difficult business environment.
The ratings agency expects India’s business environment to improve with “implementation and continued broadening of the government’s structural reform agenda.”
Fitch anticipates real GDP growth to slightly accelerate to 7.7% in FY17 and 7.9% in FY18 due to an expected pick-up in consumption in both urban and rural areas from pay commission increase in salaries and better monsoon.
“Policy rate cuts of 150bp in total since January 2015 may also contribute to growth, even though weak bank balance sheets continue to impair monetary transmission,” the ratings agency said while pointing out the weak private investment.
“Passage of the new Bankruptcy Code in both houses of parliament in May 2016 showed that big-ticket reforms are possible in India, even though the government’s proposal for a Goods and Services Tax has thus far not passed in the Upper House (Rajya Sabha),” it said. “Reforms that only require executive approval continue to be rolled out and some legislative reforms are being pursued at the state level.”
It said weak fiscal balances continue to constrain its ratings, but for FY16 government sticking to its 3.5% target for FY17 has strengthened its fiscal credibility.
“The review of the Fiscal Responsibility and Budget Management Act leads to short-term uncertainty on the medium-term fiscal framework, but might also provide an opportunity if it brings the fiscal parameters closer in line with India’s peers,” it said.
The ratings agency expects general government debt to reach 69.4% of GDP in FY17 and the general government deficit to slightly fall to 6.8% of GDP.
The budgeted Rs 70,000 crore capital injection into banks between FY16 and FY19 may not be sufficient, the rating agency said while pegging the banking system needs at around $90 billion.
India’s relatively strong external balances make the country less vulnerable to external shocks and the country is less vulnerable to a severe slowdown scenario in China, as India’s exports to China comprise only 3.5% of total exports and its more domestically based economy is not part of the Asian supply chain.
“The medium-term Brexit impact on the real economy seems limited given that India’s exports to both the UK and the rest of the EU have fallen to 3.4% and 13.6% respectively of total exports,” it said.