Fitch retains India's ratings at lowest investment grade

The outlook contrasts with that of Moody's Investors Service, which recently upgraded outlook for India to stable from negative. Standard & Poor's too has a stable outlook on their ratings on India. All three have given India the lowest investment grade.

Fitch said the medium-term debt trajectory remains core to its rating assessment, as higher debt levels constrain the government's ability to respond to shocks and could lead to a crowding out of financing for the private sector.

The general government debt rose to 89.6 per cent of the gross domestic product (GDP) during  the last fiscal, the highest among emerging-market peers.

"We forecast the ratio to decline slightly to 89 per cent, still well above the 60.3 per cent median among similarly rated economies in 2021. The debt ratio should fall to 86.9 per cent by FY'26 under our medium-term baseline forecasts, assuming 10.5 per cent nominal growth and the gradual consolidation of the general government primary deficit to 2.5 per cent of GDP," Fitch said.

Risks to this forecast include India's weak record of fiscal consolidation; Fitch said. It cited that the government debt fell between the 2007-2008 global financial crisis and FY15, but then rose gradually despite double-digit nominal GDP growth.

Risks associated with India's high public debt are partly offset by the country's ability to finance its deficits domestically, which is a strength relative to most rated peers.

Fitch forecast a robust GDP growth of 8.7 per cent during 2021-22 and 10 per cent during FY23, supported by the resilience of India's economy, which has facilitated a swift cyclical recovery from the Delta COVID-19 variant wave in the second quarter of the last fiscal. It forecast the GDP growth to be around seven per cent between FY24 and FY26.

The rating agency said mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector.

It said the government's production-linked incentive scheme to boost foreign direct investment, labour reform and the creation of a 'bad bank', along with an infrastructure investment drive and the National Monetisation Pipeline, should support the growth outlook if fully implemented.

There are challenges to this outlook as well, given the uneven nature of the economic recovery and reform implementation risks, it added.

ALCHEMPro News Desk (DS)