Fitch flags fiscal Achilles heel, denies India rating upgrade

Fitch on Friday retained its sovereign rating at 'BBB-', the lowest investment grade with a stable outlook, citing weak fiscal balances and structural factors such as governance standards and business environment.

The government had made a strong pitch to Fitch Ratings for an upgrade after rival Moody's Investors Service last November gave the country its first sovereign rating upgrade since 2004.

Fitch had last upgraded India's sovereign rating from BB+ to BBB- with a stable outlook on August 1, 2006.

"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 rating agency said.

Refusing to upgrade India's credit rating for the 12th year in a row, Fitch added that weak fiscal balances, the Achilles' heel in India's credit profile, continue to constrain its ratings.

"General government debt rose to 69 per cent of GDP in 2017-18 fiscal while fiscal slippage of 0.3 per cent of GDP in both FY18 and FY19 relative to the government's own budget targets of last year, implies a general government deficit of 7.1 per cent of GDP," it said.

The government aims to gradually reduce its fiscal deficit from 3.5 per cent of GDP in 2017-18, but would not hit the 3 per cent ceiling of the Fiscal Responsibility and Budget Management (FRBM) Act before March 2021, which is well beyond its current electoral term, Fitch said.

"The Indian economy is less developed on a number of metrics than many of its peers. Governance continues to be weak, as illustrated by a low score for the World Bank governance indicator. India's ranking on the United Nations Human Development Index also indicates relatively low basic human development," it said.

After the last rating upgrade on August 1, 2006, Fitch had 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. The Fitch review for annual sovereign rating follows India's rating upgrade by Moody's after a gap of 14 years, while S&P retained its rating for the country.

Moody's had in November 2017 raised India's sovereign rating from the lowest investment grade of 'Baa3' to 'Baa2'.