The country’s rating reflects strengths from a robust growth outlook compared to peers and still-resilient external finances, which have supported India in navigating the large external shocks during the past year. 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, according to a press release by Fitch.
India is somewhat insulated from the gloomy global outlook in 2023, given its modest reliance on external demand. Nevertheless, declining exports and heightened uncertainty are expected with higher interest rates to slow growth to 6.2 per cent in FY24 (‘BBB’ median: 2.0 per cent). Consumption growth is also anticipated to moderate as pent-up demand fades.
India’s robust medium-term growth outlook is a key supporting factor for the rating. A clear improvement in corporate and bank balance sheets, which were under strain prior to the pandemic, is likely to facilitate a steady acceleration in investment in the coming years. The government’s ongoing infrastructure drive and reform agenda, along with efforts to attract greater FDI inflows, supplement these prospects. Nevertheless, risks remain given dynamics in labour force participation, the lagging rural sector recovery, and uneven reform implementation record.
Financial sector risks continue to ease on the back of the strong and durable economic recovery. Asset quality pressures are expected to remain well-contained, even as regulatory forbearance unwinds, supporting the sector’s performance. Credit growth has picked up rapidly, and these trends are projected to be sustained on the back of resilient credit demand and increased risk appetite, provided capitalisation is well-managed. The normalisation of domestic liquidity conditions is partly mitigated by high deposit funding.
The general government deficit has receded from its pandemic high of 13.5 per cent of GDP (excluding disinvestment), but is forecast to remain large compared to peers. The deficit is expected to fall slightly to 9.6 per cent of GDP in FY23 (‘BBB’ median: 4.1 per cent) from 9.8 per cent in FY22. For the central government, modest fiscal slippage is anticipated in FY23 with a deficit of 6.6 per cent of GDP (including disinvestment) relative the 6.4 per cent budget target, but revenue growth and expenditure switching will contain the measures’ fiscal toll, while allowing capital spending to remain a priority.
Fitch’s FY23 general government deficit forecast is lower than the 10.5 per cent of GDP expected during its June 2022 review, largely because state deficits have declined much faster than anticipated. Strong revenue and constrained spending brought the provisional aggregate state deficit to just below the pre-pandemic norm of 3 per cent of GDP in FY22 from 4.1 per cent in FY21. The deficit is expected to remain around these levels in FY23.
The RBI is projected to keep the repo rate on hold at 6.25 per cent through FY24 following a cumulative 225bp in repo rate hikes between April and December 2022. Risks are tilted toward slightly more tightening as core inflation remains sticky at around 6 per cent and market expectations around Fed rate hikes could remain volatile.
ALCHEMPro News Desk (NB)
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