Vehicles and pedestrians cross the Howrah Bridge in Kolkata. (Photographer: Brent Lewin/Bloomberg)

Fitch Keeps India’s Sovereign Rating Unchanged Citing Weak Government Finances

Fitch Ratings kept India’s long-term sovereign rating unchanged citing weak government finances and structural factors such as governance standards and business environment.

The agency affirmed India’s rating at BBB-, the lowest investment grade, and maintained a stable outlook. “Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings,” Fitch said in a statement while acknowledging India’s favourable external balances and strong medium-term economic growth outlook. Strong external buffers and a comparatively closed economy makes India less susceptible to external shocks, it said.

Fitch joins Standard & Poor’s in keeping India’s rating unchanged after Moody’s upgraded the Asia’s third-largest economy in November from the lowest investment grade overlooking short-term uncertainties related to the cash ban and the goods and services tax. The economy has since picked up pace but the government breached its fiscal deficit target in the year ended March. There are concerns that rising crude will add to pressure on its finances.

The government last month sought an upgrade in a meeting with Fitch Ratings, citing its commitment to fiscal consolidation. Officials told the ratings agency that India would maintain fiscal discipline and work towards meeting its 3 percent fiscal deficit target for the financial year 2021-22, as stated in this year’s Union Budget.

Fitch noted that India’s general government debt amounted to 69 percent of the GDP in the year ended March compared to the median of 41 percent for economies rated BBB. India’s state and center fiscal deficits combined add up to 7.1 percent of the GDP compared to the median of 2.1 percent for similarly rated economies, it said.

The central government currently aims to gradually reduce its own fiscal deficit from 3.5 percent in FY18, but would not hit the 3.0 percent of GDP ceiling of the Fiscal Responsibility and Budget Management Act before March 2021, which is well beyond its current electoral term.
Fitch Ratings

The rating agency acknowledged that the amendment to the Fiscal Responsibility and Budget Management Act is a “positive step towards a more prudent fiscal framework”. It sets a ceiling for central government debt at 40 percent and general government debt at 60 percent of the GDP by March 2025.

The government will have to pump more into India’s state-owned banks though, it said. With the bad-loan clean-up still underway, most of the capital injection is likely to be absorbed by losses associated with the resolution process, rather than to fund new lending, Fitch said.

Fitch expects the sector-wide non-performing loan ratio to rise to 11.5 percent of total loans by end-FY18, up from 4.6 percent in FY15, due mainly to stricter implementation of standards.
Fitch Ratings

Other Highlights

  • Growth to rebound to 7.3 percent in FY19 and 7.5 percent in FY20 with the effects of twin shocks of demonetisation and goods and services tax implementation fading.
  • Inflation to average close to 4.9 percent in FY19.
  • The Reserve Bank of India is expected to start raising the repo rate next year from 6 percent currently as growth gains further traction.