Global rating agency Fitch on Thursday maintained India’s sovereign rating at ‘BBB-’, the lowest investment grade, with stable outlook. This may disappoint the government as it was expecting a rating upgrade on the basis of fiscal consolidation and various reform measures.

According to Fitch, the main factors that, individually or collectively, could trigger positive rating action include greater confidence in a sustained reduction in general government debt over the medium term and higher sustained investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation.

Similarly, factors that could trigger negative rating action include a rise in the government debt burden and loose macro-economic policy settings that cause a return of persistently high inflation and widening current-account deficits, which would increase the risk of external funding stress.

Growth Projection

The agency lowered growth projection for 2019-20 to 6.8 per cent, 50 basis points less than projections made in November. Also, the growth rate for 2020-21 will be 20 basis points lower than the initial projection of 7.1 per cent. Accommodative monetary policy, an easing of bank regulations and government spending will help achieve the above- mentioned rates, the agency said.

“We estimate real GDP growth to have slowed slightly to 6.9 per cent in FY19 from 7.1 per cent a year earlier,” the agency said adding that a deceleration in the recent quarters has mainly been domestically driven, from weak manufacturing performance and low food inflation weighing on farmers. It also mentioned that limited available indicators also point to a rise in unemployment.

However, the good news is that India’s growth rate is still very high. According to recently revised official GDP data, growth averaged 7.5 per cent in the five years up to and including FY19, which is more than twice as fast as the historical ‘BBB’ peer median of 3.6 per cent,” it said.

General Elections

According to the agency, polls indicate that the next government is likely to have a smaller majority in the Lower House of Parliament, and might find it more difficult to garner support for major reforms such as the GST. However, “there seems to be plenty of potential for a continued focus on reforms, for instance through enhancement of the efficiency and effectiveness of the administration and the legal and judiciary system,” it said.

The agency cautioned about fiscal situation. It said that weak fiscal position continues to constrain India's sovereign ratings. In this regard, the next Government’s medium-term fiscal policy will be of particular importance from a rating perspective. Modest fiscal slippage relative to the Central government’s own targets in recent years has resulted in a stalling of fiscal consolidation.

“Campaign promises to support farmers’ incomes, including direct cash transfers and farm loan waivers will, moreover, add to spending pressures in FY20. The general government (Centre and States combined) deficit has remained broadly stable at around 7 per cent of GDP in the past five years. “Significant and politically difficult fiscal deficit reduction would be key to meet the general government debt ceiling of 60 per cent of GDP by March 2025, as introduced in the Fiscal Responsibility and Budget Management (FRBM) Act in February 2018,” it said.

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