Fitch Ratings affirms India’s sovereign debt rating at ’BBB-’, with a stable outlook

Fitch Ratings on Thursday reaffirmed India’s sovereign debt rating at 'BBB-', with a stable outlook, citing the country’s robust medium-term growth prospects and solid external finance position.

The 'BBB' rating reflects low default risk expectations, where the capacity to meet financial commitments remains adequate despite potential vulnerabilities from adverse business or economic conditions, according to Fitch Ratings.

Read this | Budget 2024: The four challenges that could form the backdrop for Centre's moves

"India's ratings are underpinned by its strong medium-term growth outlook, which will continue to drive improvement in structural aspects of its credit profile, including India's share of GDP in the global economy, as well as its solid external finance position," Fitch noted in its latest rating action commentary.

A key factor in the positive outlook is India’s recent progress in fiscal credibility. The government’s ability to meet deficit targets, along with enhanced transparency and buoyant revenues, increases the likelihood of a modest downward trend in government debt over the medium term, Fitch said.

In fiscal year 2024, the Indian government successfully contained the fiscal deficit at 5.6% of GDP, below the revised estimate of 5.8%, thanks to stronger-than-expected revenue collections. The fiscal deficit target has been further trimmed to 4.9% for FY25, down from the 5.1% target set during the interim budget in February.

The government aims to reduce the fiscal deficit to 4.5% or lower by FY26, adhering to its proposed fiscal glide path.

Fitch projected India’s GDP growth at 7.2% in FY25 and 6.5% in FY26, bolstered by public infrastructure investments, strong private sector investment in real estate, and a resurgence in manufacturing.

While India’s growth prospects are supported by the government’s infrastructure initiatives, a strong services sector, and a healthy private investment outlook, the rating agency highlighted the improved financial health of banks and corporate balance sheets as a catalyst for a positive investment cycle.

However, Fitch cautioned that the private investment cycle might falter if subdued consumption hampers job creation, potentially limiting the benefits of India’s demographic dividend.

Elevated public debt remains a significant concern, with the debt trajectory highly sensitive to growth outcomes. Fitch warned that risks to the path of debt reduction persist if nominal growth falls below double digits.

"New medium-term fiscal objectives have yet to be fully defined, but the recent budget highlighted the intention to sustain debt on a downward path," Fitch added. “Further clarity on medium-term fiscal objectives will be critical to assessing the sustained commitment to more prudent fiscal management.”

According to finance ministry’s estimates, central government debt is expected to rise to ₹185.27 trillion, or 56.8% of GDP, in FY25, up from ₹93.26 trillion, or 49.3% of GDP, in 2018-19. The debt-to-GDP ratio has seen fluctuations, standing at 52.3% in 2019-20, 61.4% in 2020-21, 58.8% in 2021-22, 57.9% in 2022-23, and 58.2% in 2023-24.

Also read | Moody’s Ratings upgrades India’s GDP growth forecast to 7.2% in 2024 and 6.6% in 2025

This increase in debt is attributed to higher spending on infrastructure and social schemes aimed at driving economic growth.