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Fitch affirms India's sovereign rating at 'BBB-'; pegs GDP growth at 7.8% for FY19
Nov-16-2018

Citing weak fiscal position continues to constrain the ratings and there were significant risks to macroeconomic outlook, Fitch Ratings has refused to upgrade India’s credit rating for the 12th year in a row and affirmed the country’s long-term foreign-currency issuer default rating (IDR) at 'BBB-' with a Stable Outlook. The rating agency had last upgraded India's sovereign rating from BB+ to BBB- with a stable outlook on August 1, 2006. It also said that the rating balances a strong medium-term growth outlook and favourable external balances relative to peers with weak fiscal finances, a fragile financial sector and some lagging structural factors.

As per the rating agency, risks to the macroeconomic outlook are significant, and include a drop in credit growth, resulting from further problems in the banking or shadow-banking sector. It added that a weak fiscal position continues to constrain India's sovereign ratings. It also expressed caution that as government debt at close to 70% of Gross Domestic Product (GDP), the government may find it tough to meet its fiscal deficit target of 3.3% of GDP in the current financial year (2018-19) due to lower revenues including from GST in first half, and expenditures being difficult to control in the run-up to general elections were main reasons for the weak fiscal position. It noted that the Indian economy continues to exhibit some structural weaknesses relative to peers and is less developed on a number of metrics.

On the economic growth front, Fitch stated that its strong growth outlook continues to stand out among peers and upgraded it real GDP growth forecast at 7.8% for the current financial year ending March 2019 (2018-19) from 7.3% forecasted earlier in April this year, while it is also up from 6.7% in the previous FY2017-18. However, this forecast is subject to downside risks from tightening financial conditions, weak financial-sector balance sheets and high international oil prices. It also forecasts growth to decelerate to a still-strong 7.3% in both FY2019-20 and FY2020-21 for the same reasons. Besides, it expected current-account deficit to widen to 3% in FY2018-19 and 3.1% in FY2019-20 from 1.9% in FY2017-18.

Listing recent defaults by Infrastructure Leasing & Financial Services and some public-sector banks, the rating agency highlighted risks in a sector that in recent years supplied around a third of total credit growth. It said banks do not seem in a position to significantly spur credit growth, as they still have weak core capital positions and added that non-performing loan (NPL) ratio could in near future rise from 11.6% in FY2017-18 due to residual stress. It further said while India jumping 53 positions in just two years to 77th out of 190 countries on the World Bank's Ease of Doing Business ranking was remarkable, lingering difficulties in doing business in India remain, including in starting a business and enforcing contracts, and FDI is lagging.

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