Fitch has affirmed India’s sovereign rating at ‘BBB Minus’ with a stable outlook. It also said that India is set to remain among the fastest-growing sovereigns globally. 

Sovereign rating is used as one of the parameters for investment decisions by foreign investors. ‘BBB Minus’ is the last investment grade. A stable outlook reflects that the rating may not be revised downwards soon. When the outlook is changed to positive, then there is a possibility of the rating being revised upwards, possibly in the next two years, subject to certain conditions.

Giving the rationale behind affirmation, Fitch said that 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.

“Strengthening fiscal credibility from recent achievement of deficit targets, enhanced transparency and buoyant revenues, have increased the likelihood that government debt can follow a modest downward trend in the medium term,” it said while cautioning that fiscal metrics remain a credit weakness, with deficits, debt and debt service burden all high compared to ‘BBB’ range peers.

Earlier in May, taking note of robust growth and rising quality of government spending, S&P Global Ratings revised its outlook on India’s economy to ‘positive’ from ‘stable’. However, it retained the sovereign rating as ‘BBB Minus’. S&P was the first one to revise the outlook after a 10-year gap.

Poll results

Taking note of the BJP-led National Democratic Alliance (NDA) winning the Lok Sabha election, the agency said that policy continuity around the infrastructure drive, digitalisation, and ease of doing business measures supports growth, but “coalition politics and a weakened mandate will likely constrain the government’s ability to enact major economic reforms, limiting upside to potential growth.” Still, state governments are likely to steadily advance reforms around land and labour, it said.

GDP Growth

The agency has estimated India’s growth rate to be 7.2 per cent for FY 2024-25 and 6.5 per cent for FY 2025-26. Though the growth rate in FY25 is lower than 8.2 per cent of FY24, still the agency said: “India is set to remain among the fastest-growing sovereigns globally.” Public infrastructure capex remains a key growth driver and has improved spending quality, helping mitigate the drag from fiscal consolidation. Private investment in real estate is likely to remain strong and there are signs of a nascent pick-up in manufacturing investment, it mentioned.

Fiscal Health

The agency acknowledged improvement in fiscal health as it feels that economy beat expectation in fiscal consolidation. Its estimate for current fiscal is government’s targe of 4.9 per cent for FY25. It listed buoyant revenues, including a larger-than-budgeted Reserve Bank of India (RBI) dividend, and contained social spending, notably during an election year as reasons for improvement in fiscal health.

“We believe the central government will achieve its FY26 deficit target of 4.5 per cent of GDP or below, which was set in the FY22 budget, as we forecast a 4.4 per cent deficit,” the agency said. After FY26, we forecast a steady deficit reduction of 0.2 per cent of GDP per year to about 3.8 per cent in FY29, assuming sustained strong revenue growth and a slight reduction in capex spending, it said.

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