New Delhi: Fitch Ratings on Wednesday said its lowest investment grade rating of 'BBB-' for India balances the country’s improved prospects for growth, inflation and the external balances, with limited progress on the fiscal front.
Asia-Pacific economies face challenges to varying degrees from imminent Fed tightening, China's slowdown, weaker commodity prices and still-lacklustre global trade growth, Fitch Ratings said in a new report today.
However, coherent, credible policy management can buffer sovereign credit profiles against risks, it added. In India, "the government has not been able to pass some big-ticket legislative reforms in the senate (Rajya Sabha), like those related to land acquisition and a national Goods and Services Tax, but it has continued to roll out executive reforms," it said.
A recent major liberalisation of FDI rules and a plan to restore the financial viability of the country's power distribution companies indicate that India's reform momentum remains intact.
Fitch said the broader reform agenda will bring India’s weak investment climate closer in line with that of its peers, with the impact on GDP growth hinging on actual implementation.
"A recommended 23.55 per cent increase in remuneration for India’s central government employees by the 7th Pay Commission, if fully implemented, would add to challenges the government faces in achieving the fiscal consolidation targets," it said.
It added that there were no indications that the government will miss its short-term FY16 target, but realising the medium term targets will depend to a large extent on revenue mobilisation.
"The government could also choose to amend its medium-term targets in the next budget and further delay achieving a deficit of 3.0 per cent of GDP, currently targeted for FY18,"it said.
Fitch said the positive sensitivities for India were “sustained fiscal consolidation or fiscal reforms that lead to a sharp decline in the ratio of gross general government debt to GDP (and) an improved business environment resulting from implemented reforms and structurally lower inflation levels, which would support higher investment and real GDP growth.”
On the negative side are deviation from the fiscal consolidation path, causing the high public debt burden to persist, or a greater-than-expected deterioration in the banking sector's asset quality that necessitates large-scale financial support from the sovereign. Also, loose macroeconomic policy settings that cause are turn of persistently high inflation levels and widening current account deficit, which would increase the risk of external funding stress, it said.
"India's ratings and outlook balance the country’s improved prospects for growth, inflation and the external balances, with limited progress on the fiscal front," Fitch said.
