Fitch retains India's default rating at BBB-; calls weak fiscal balance Achilles' heel

New York based credit rating agency Fitch has affirmed India's default rating at 'BBB-' with a stable outlook . Fitch said India's rating balances a strong medium-term growth outlook and favourable external balances with weak fiscal finances and some lagging structural factors, including governance standards and a still-difficult, but, improving, business environment.

The agency said a favourable economic growth outlook continues to support India's credit profile, even though real GDP (Gross Domestic Product) growth fell to 6.6 per cent in the fiscal year ended March 31, 2018 (FY18) according to official preliminary estimates, from 7.1 per cent in FY17.

Growth to rebound to 7.3% in FY19

Fitch forecasts growth to rebound to 7.3 per cent in FY19 and 7.5 per cent in FY20, as a temporary drag will fade from the withdrawal of large-denomination bank notes in November 2016 and the introduction of a Goods and Services Tax (GST) in July 2017. It said the GST is an important reform, which is likely to support growth in the medium term once "teething issues dissipate".

The agency also said India's five-year average real GDP growth of 7.1 per cent is the highest in the APAC (Asia Pacific) region and among 'BBB' range peers. The growth is expected to remain high for a substantial period of time, said the global credit agency. According to a recent Fitch analysis, India has the highest medium-term growth potential among the largest emerging markets.

Inflation to average 4.9% in FY19

The agency said the RBI (Reserve Bank of India) is building a solid monetary policy record, as consumer price inflation has been well within the target range of 4 per cent +/- 2 per cent since the inception of the Monetary Policy Committee in October 2016. Fitch expects inflation to average close to 4.9 per cent in FY19, still almost double the 'BBB' range median of 2.5 per cent for 2018.

"We expect the RBI to start raising its policy repo rate next year from 6 per cent currently as growth gains further traction. Monetary tightening could be brought forward if recent government policies push up inflation expectations, including the decision to increase Minimum Support Prices for agricultural goods to 1.5 times the cost of production and increased customs duties on certain products, including electronics, textiles and auto parts," said the agency.

Recovery in FDI expected

The agency says the Indian government has continued to gradually open the economy to foreign investors, including allowing 100 per cent FDI (Foreign Direct Investment) in the single-brand retail through the automatic route since January 2018. Such measures may facilitate a recovery in FDI, particularly if combined with further investment climate reforms. India rose 30 places in the World Bank's Ease of Doing Business ranking in 2017 and has ample potential to improve its position further, as it still ranks below both the 'BBB' and 'BB' medians.

Weak fiscal balances are Achilles' heel

Weak fiscal balances continue to constrain its ratings, says the agency, adding: "Government debt amounted to 69 per cent of the GDP in FY18 ('BBB' median: 41 per cent of GDP), while fiscal slippage of 0.3 per cent of the GDP in both FY18 and FY19 relative to the government's own budget targets of last year. This implies a general government deficit of 7.1 per cent of GDP ('BBB' median: 2.1 per cent)."

The rating was assigned to the country 11 years ago. Fitch had last upgraded the rating from 'BB+' to 'BBB-' with stable outlook on August 1, 2006. Later, it changed the outlook to negative in 2012 and then again to stable in the following year, though it kept the rating unchanged at the lowest investment grade.