Fitch upgrades India outlook to stable from negative

Fitch Ratings revised India’s outlook from ‘negative’ to ‘stable’ on Friday, June 10, 2022, citing fading downside risks to medium-term growth thanks to a rapid economic recovery and easing of weaknesses in the financial sector.

The global rating firm has, however, lowered its GDP growth forecast for 2022-23 from 8.5% projected in March to 7.8% due to the impact of inflation on the growth momentum

Despite near-term headwinds from the global commodity price shock, Fitch said it expects robust growth for India relative to its similarly rated peers, but the country’s public finances remain a credit weakness with the debt ratio broadly stabilising, based on its expectations of ‘persistent large deficits’.

The firm affirmed India’s long-term foreign currency issuer default rating at ‘BBB-’ while revising the outlook, noting that this ‘balances India’s external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators’. A BBB rating reflects low expectations of default risk with adequate capacity for payment of financial commitments, although adverse business or economic conditions are more likely to impair this capacity.

While high nominal GDP growth has facilitated a near-term reduction in India’s debt-to-GDP ratio, Fitch Ratings said higher subsidies this year along with the excise duty cuts on fuel to offset the surge in consumer prices will cost about 0.8% of GDP. This will push the fiscal deficit of the Centre to 6.8% of GDP from the 6.4% Budget target for 2022-23, despite robust revenues, it reckoned.  

“We forecast India’s general government fiscal deficit to remain broadly stable at 10.5% of GDP (excluding divestment) in 2022-23, compared to 10.7% in 2021-22,” Fitch said in its rating action commentary.  

In the medium term, Fitch Ratings expects India’s growth of around 7% between 2023-24 and 2026-27, underpinned by the government’s infrastructure push, reform agenda and easing pressures in the financial sector, stressing that this strong growth outlook is a key driver for its decision as it will sustain a ‘gradual’ uptick in credit metrics.

“Nevertheless, there are challenges to this forecast, given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms,” it cautioned.  

While the Reserve Bank of India (RBI) now expects inflation to average 6.7% through 2022-23, Fitch estimated it could be higher at 6.9%, compared to median rate of 4.9% for BBB-rated nations, citing ‘the sharp rise in global commodity prices and underlying demand pressures’.

The rating firm expects the RBI, which has raised key rates by 90 basis points since May, to continue to withdraw liquidity and raise rates, with the repo rate reaching 6.15% by 2023-24.

Despite India’s high public debt, its ability to finance deficits domestically is a strength for the country vis-à-vis its peers, Fitch said, pointing to a mere 2% of government securities being held by non-residents, and foreign currency debt at just 5% of India’s total debt, as opposed to the median rate of 33% for BBB-rated countries.

“However, sustained large fiscal financing needs are likely to contribute to a crowding out of private-sector lending and higher borrowing costs,” Fitch warned, noting that India’s fiscal consolidation target for 2025-26 may be difficult to meet.

“In its February budget, the central government retained its 4.5% of GDP FY26 deficit target, but little clarity was given on measures to achieve it. In our view, achieving this target could prove challenging, particularly as revenue/GDP has already returned to pre-pandemic levels,” the firm said.

“We expect the general government fiscal deficit to narrow at a modest pace over the next several years, reaching 8.9% of GDP by 2024-25,” it underlined.