India's economic resilience, especially in navigating a challenging external environment, has been a key factor in sustaining the rating. However, high deficits, debt, and interest-to-revenue ratios continue to be major constraints, along with lagging structural metrics such as World Bank governance indicators and GDP per capita.

The country's GDP growth outlook remains strong, with Fitch forecasting a 6.9 per cent growth for the fiscal ending March 2024 (FY24), an increase from the previous 6 per cent forecast. This robust momentum is expected to ease slightly to 6.5 per cent in FY25. Investment, driven by government capital expenditure and private sector contributions, is anticipated to be a primary growth driver, while consumption may moderate due to reduced household savings, as per Fitch’s rating action commentary.

India's potential GDP growth is estimated at 6.2 per cent, supported by government infrastructure initiatives, a positive private investment outlook, and favourable demographics. Healthy bank and corporate balance sheets are likely to encourage a positive investment cycle, although risks related to labour market weaknesses persist.

Inflation, though volatile in 2023, saw core inflation decelerate to 3.7 per cent in December from around 6 per cent at end-2022. Fitch forecasts headline inflation to ease to 4.7 per cent by end-2024 from 5.7 per cent in December 2023, allowing for a potential 75 basis point rate cut by the Reserve Bank of India (RBI) in FY25.

Fitch predicts the general government fiscal deficit to remain high at 8.6 per cent of GDP in FY24, with the central government likely to meet its 5.9 per cent deficit target. The agency expects revenue collection to stay strong and expenditure quality to improve, although subsidy and income support spending may exceed budget expectations.

Looking beyond FY24, the fiscal consolidation path appears challenging, with trade-offs between economic growth and deficit reduction becoming more pronounced. The central government aims to reduce the deficit to 4.5 per cent of GDP by FY26, but details on achieving this target are limited. High levels of capital expenditure are expected to continue, with spending cuts likely being the primary method for deficit reduction.

India's public debt remains high at 82.7 per cent of GDP in FY24, compared to 56 per cent for 'BBB' peers. Despite strong nominal GDP growth, the debt ratio is projected to decline only slightly by FY28. The high interest payment-to-revenue ratio of around 25 per cent in FY24 is a structural weakness.

With general elections expected in April-May 2024, polls suggest continuity under the incumbent Bharatiya Janata Party led by Prime Minister Narendra Modi. Policy continuity, gradual fiscal consolidation, and sustained economic reform momentum are anticipated, Fitch added.

India's foreign-exchange reserves are forecasted to rise further due to substantial portfolio inflows and a narrower current account deficit. The RBI's management of the exchange rate and anticipated additional inflows are expected to boost reserves to $654 billion by end-2024.

In terms of environmental, social, and governance (ESG) factors, India scores '5' for political stability and rights and '5[+]' for the rule of law, institutional and regulatory quality, and control of corruption.

Fibre2Fashion News Desk (DP)