Reforms fail to upgrade India’s BBB- Fitch rating

India has a difficult business environment, says Fitch

Despite a slew of reform measures by the central government, international rating agency Fitch on Tuesday refrained from increasing India’s rating claiming “weak public finances”.

Fitch kept India’s sovereign rating unchanged at ‘BBB-’ — the lowest investment grade — with a stable outlook.

Fitch indicated its India’s sovereign ratings balance a strong medium-term growth outlook and favourable external balances with a weak fiscal position and difficult business environment.

However, it said the business environment is likely to gradually improve with the implementation and continued broadening of the government’s structural reform agenda.

“Weak public finances continue to constrain India’s ratings, with a high general government debt burden of 67.9 per cent of GDP and wide fiscal balance of -6.6 per cent of GDP as estimated by Fitch for FY17,” said the rating agency.

But, it said there are some early indications that fiscal policy might become more focused on bringing down debt.

Fitch pointed out that an official committee reviewing the Fiscal Responsibility and Budget Management Act has recommended lowering the government debt to 60 per cent of GDP.

Fitch also said that it remains uncertain if the government will commit to the target suggested by the committee.

“The central government’s FY18 Budget also continues its gradual consolidation efforts irrespective of the difficult trade-off with the desire to spur infrastructure spending," said the agency.

The rating agency said that banking sector’s non-performing loans (NPLs) problem is well recognised by authorities, but continues to linger.

“It is not likely that the government's budgeted `700 billion ($11 billion) capital injection into banks between FY16 and FY19 will be sufficient. Fitch estimates the banking system, including private sector banks, needs capital of around `6 lakh crore ($90 billion),” said the rating agency.

Fitch claimed that India's economy is less developed on a number of structural metrics than many of its peers.

“Average per capita GDP remains low, at $1,714, compared with the ‘BBB’ range median of $9,701. The governance standards also remain weak, as illustrated by a low score for the World Bank governance indicator (46th percentile versus the ‘BBB’ median of 58th percentile),” said the rating agency.