New Delhi, Apr 27: Rating agency Fitch on Friday kept India’s sovereign rating unchanged at BBB-, the lowest investment grade for the 12th year with stable outlook even as it praised the implementation of the Goods and Services Tax (GST). It said that the GST will drive the mid-term growth once the teething troubles are resolved.
“Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings,” Fitch said while reaffirming India’s rating for the 12th year. It forecast India’s GDP growth to rebound to 7.3% in FY19 and 7.5% in FY20, as a “temporary drag will fade” caused by demonetisation and the GST in 2016 and 2017 respectively.
“The GST is likely to support growth in the medium term once teething issues dissipate. India’s five-year average real GDP growth of 7.1% is the highest in the APAC region and among ‘BBB’ range peers,” Fitch said. However, India’s Per capita GDP is the lowest among its ‘BBB’ range peers, the rating agency said.
Fitch said that if the government reduces its debt over the medium term and achieves higher sustained investment and growth rates without the creation of macro imbalances, it would make a strong case for an upgrade in rating. It said that government debt amounted to 69% of GDP in FY18 (while ‘BBB’ median is 41% of GDP), while fiscal slippage of 0.3% of GDP in both FY18 and FY19 relative to the government’s own budget targets of last year, implies a government deficit of 7.1% of the GDP as against ‘BBB’ median: 2.1%.
The rating agency lauded government’s decision to announce Rs 2.11 lakh crore bank recapitalisation but in the wake of the massive fraud at Punjab National Bank, it said, it is likely that the banks will need additional capital.”Most of the capital injection is likely to be absorbed by losses associated with NPL (non-performing loans) resolution rather than rather than to fund new lending.”