HONG KONG (Fitch) - Fitch Ratings has revised India's outlook to stable from negative and affirmed its long-term foreign- and local-currency issuer default ratings (IDRs) at 'BBB-'. The agency has also affirmed the country ceiling at 'BBB-' and the short-term foreign-currency IDR at 'F3'.
KEY RATING DRIVERS
The revision of the Outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth.
The Outlook revision and the affirmation of India's investment-grade ratings reflect the following factors:
- The authorities were successful in containing the upward pressure on the central government budget deficit in the face of a weaker-than-expected economy. The central government fiscal deficit was 4.9% of GDP in FY13 (financial year ended March 2013), compared with 5.7% in FY12 and Fitch's forecast when it placed India's ratings on Negative Outlook in June 2012 of close to 6%.
- Fitch expects the government to broadly meet its FY14 budget deficit target of 4.8% of GDP (including privatisation receipts) and to gradually reduce the high level of public debt over the medium-term. General government gross debt (GGGD) as a share of GDP was at 64% in FYE13, significantly higher than both the 'BB' and 'BBB' peer rating group medians of 33% and 40% respectively. However, it is substantially below the level of 79% of GDP when Fitch upgraded India to 'BBB-' in 2006.
- The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors. The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for foreign-direct investment to access a range of industries. Nonetheless, the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalisation of insurance and pension provision and public procurement, which are pending parliamentary approval. Addressing the structural issues in the power and mining sectors would further boost investor confidence.
- Inflation pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the Reserve Bank of India (RBI) during the course of 2011-2012. The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates.
- Fitch expects the economy to recover after real GDP grew just 5% in FY13 (vs. 6.2% in FY12). India's economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again. As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7% and 6.5% in FY14 and FY15 respectively.
- The profitability and capital position of the banking sector will remain under pressure as asset quality continues to gradually deteriorate. Nonetheless, Fitch does not view the banking sector as a material risk to macro-financial stability nor to public finances in terms of the crystallisation of large contingent liabilities.
- Despite deterioration in the current account deficit, in part due to an increase in gold imports, Fitch considers India's overall external position to be a relative rating strength. Foreign debt is moderate and RBI's international reserves, which stood at USD288bn at the end of May, provide a cushion to absorb adverse external shocks.
- India's investment-grade ratings are also underpinned by high domestic savings rates that limit the reliance on foreign savings for private investment and fiscal funding, as well as by a relative long maturity of government debt issued in its own currency. While Fitch has revised down its assumption regarding potential growth to 6%-7% from 8%-9%, it remains one of the most dynamic and diversified economies in the world.
- India's sovereign ratings remain constrained by persistent structural budget deficits and high public debt as well as by the challenges associated with large segments of the population engaged in low-valued added activities.
RATING SENSITIVITIES
The main factors that individually, or collectively, could trigger positive rating action:
- Sustained fiscal consolidation or fiscal reforms which lead to a sharp decline in the GGGD-to-GDP ratio
- An acceleration in economic reforms that leads to a material improvement in potential growth rate consistent with stable consumer price inflation and external balance
The main factors that individually, or collectively, could trigger negative rating action:
- Larger-than-projected budget deficits leading to a steady rise in the GGGD-to-GDP ratio
- A further decline in India's potential growth rate or a sustained rise in inflation
- Greater-than-expected deterioration in the banking sector's asset quality that prompts large-scale financial support from the sovereign
- A sustained deterioration in the current account deficit, which leads to heavy external funding stress
KEY ASSUMPTIONS
- Fitch's medium-term fiscal projections assume a gradual reduction in the central government budget deficit and medium-term growth rate of between 6% and 7% per annum
- Fitch assumes there were will be no sustained rise in commodity prices, particularly in crude oil, and a gradual recovery in the global economy as set out in the agency's latest Global Economic Outlook. Crude oil is forecast to average USD105 and USD100 per barrel in 2013 and 2014 respectively, while the global economy is projected to expand 2.2% and 2.8% in 2013 and 2014 respectively (vs. 2% in 2012)
- Fitch assumes there is no sharp and sustained escalation in global and financial volatility over the forecast period, for example an event with an impact on the scale of the collapse of Lehman Brothers.
