By Asit Ranjan Mishra
Govt may find it difficult to meet its deficit target of 3.3% of GDP in fiscal 2019, the ratings agency said
New Delhi: Fitch Ratings on Thursday kept India’s sovereign rating unchanged at the lowest investment grade of ‘BBB-minus’ with stable outlook, holding that a weak fiscal position continues to constrain India’s sovereign ratings. Standard and Poor’s has the same rating for India.
“India’s ratings balance 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,” Fitch said in a statement.
Moody’s Investors Service is the only major rating agency which has a higher sovereign rating for India at ‘Baa2’—one notch above the lowest investment grade—with stable outlook.
Fitch said the 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. “Recent defaults by a large non-bank financial institution, Infrastructure Leasing & Financial Services, which is partly owned by state-owned Life Insurance Cooperation of India and some public-sector banks, highlight risks in a sector that in recent years supplied around a third of total credit growth,” it added.
Moody’s in its Global Emerging Market Outlook report released on Thursday also said that India faces a potential sharp slowdown in credit availability as non-bank financial institutions face a possible credit squeeze, even though ample foreign exchange reserves buffer and very low external debt levels help provide greater resilience to economic shocks including from potentially higher oil prices. “In India, the asset quality cycle is stabilizing following massive recognition of problem loans and their gradual resolution and provisioning. However, the recent default of IL&FS, a large infrastructure company and the subsequent liquidity stress in the capital market, has created an emerging risk for banks in the country,” it added.
Fitch believes pressures to support credit growth could continue in the run-up to the general elections to be held by May 2019, and relaxation of lending regulations to some troubled sectors could delay the clean-up of the banking sector. The rating agency said the rupee which has depreciated 11% against the dollar since January could remain under pressure as the positive differential between the US and Indian policy rates continues to narrow. “The large portfolio inflows that India enjoyed in the previous few years are unlikely to return in the current external environment. Fitch expects India’s reserve buffers to cover 6.4 months of current external payments at the end of FY19, down from 7.9 months in FY18, but still stronger than the ‘BBB’ median of 4.9 months. India is also more resilient to external shocks than many peers given the comparatively closed nature of the economy,” it added.
The rating agency said the central government may find it difficult to meet its deficit target of 3.3% of GDP in FY19, down from 3.5% in FY18, as revenues, including from the goods and services tax, are lower in the first six months of this fiscal year than budget estimates, and expenditures may be more difficult to control than usual in the run-up to the general elections. “Such pressures are illustrated by a recent cut in the fuel excise tax by the central and state governments,” it added.
Fitch estimates general government debt to amount to 69.8% of GDP in FY19, almost double the ‘BBB’ median of 36% of GDP, while the expected general government deficit of 7.1% of GDP is almost three times as much as the ‘BBB’ median of 2.4%.
The government has reasserted its longer-term aim of gradual fiscal consolidation with an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act to set a ceiling for general government debt at 60% of GDP, to be reached by March 2025.