India's economic growth rate is expected to accelerate to 7.7 per cent in the current fiscal, Fitch said today while affirming India's sovereign ratings at 'BBB-' with stable outlook.
The global rating agency also raised various concerns, including weak private investment and monetary policy transmission.
"The affirmation of India's sovereign ratings balances a strong medium-term growth outlook and favourable external balances against a weak fiscal position and still-difficult business environment.
"However, the latter is likely to gradually improve with implementation and continued broadening of the government's structural reform agenda," it said in a statement.
Fitch said India exhibits one of the highest real GDP growth rates in the sovereigns space.
Its five-year average growth is among the 10 highest of all rated sovereigns and the 7.6 per cent real GDP growth in the financial year ended March 2016 exceeds the 'BBB' category median of 3.3 per cent.
"Fitch forecasts real GDP growth to slightly accelerate to 7.7 per cent in FY17 and 7.9 per cent in FY18, resulting from an expected pick-up in consumption in both urban and rural areas after a civil-servant wage hike of 24 per cent and the strong likelihood of stronger rainfall than in the previous two poor monsoon years," the rating agency said.
Referring to policy rate cuts of 150bp by RBI in total since January 2015 "may also contribute to growth", even though weak bank balance sheets continue to impair monetary transmission.
"At the same time, weak private investment indicates that the economy is still not firing on all cylinders," it said.
Fitch also expects the government's continued structural reform push to support GDP growth in the medium term.
Passage of Bankruptcy Code in both houses of Parliament in May 2016 showed that big-ticket reforms are possible in India, even though the government's proposal for a Goods and Services Tax has thus far not passed in Rajya Sabha, it said.
Those reforms that only require executive approval continue to be rolled out and some legislative reforms are being pursued at the state level.
"A resulting improvement in the business environment is also indicated by swelling foreign direct investment inflows, although India still ranks lowest among sovereigns in the 'BBB' category in the World Bank's Ease of Doing Business index, and this is not likely to change anytime soon," Fitch said.
On rate of price rise, it said inflation has substantially come down in the past two years, even though it started to pick up again in recent months to 5.8 per cent in June on the back of food price pressures.
Fitch expects inflation to remain below the five-year average of 7.8 per cent.
