New Delhi:
Fitch Ratings has reaffirmed India’s long-term foreign currency issuer default rating at ‘BBB-’ with a stable outlook. This decision, announced on a recent Monday, highlights the country’s robust growth prospects and strong external buffers. However, Fitch also pointed out significant concerns regarding high debt levels and ongoing fiscal pressures that pose challenges to India’s credit profile.
India’s Economic Resilience Amid Debt Challenges
This latest assessment follows a recent upgrade from S&P Global Ratings, which recently raised India’s long-term rating to ‘BBB’—a significant milestone as it’s the first sovereign upgrade since 2007. Despite this positive momentum, Fitch highlighted an underlying issue: elevated debt levels. The agency forecasts an increase in India’s general government debt, predicting that it will reach approximately 81.5% of GDP in FY26. This level far exceeds the ‘BBB’ median of 59.6%. Fitch underscores that if nominal growth rates remain under 10%, reducing this debt burden could become increasingly difficult.
For context, India’s government debt has surged over the past decade—from ₹71 trillion (51.5% of GDP) in FY16 to an anticipated ₹200 trillion (56.1% of GDP) by FY26. The impact of the COVID-19 pandemic exacerbated this financial strain, causing the debt-to-GDP ratio to peak at 61.4% in FY21 due to increased fiscal deficits. Since then, measures aimed at fiscal consolidation have started to alleviate some of this pressure, with a goal to reduce debt levels to 50% by FY31.
The Path Forward: Fiscal Consolidation and Economic Growth
India’s current fiscal strategy focuses on stabilizing and reducing government debt. The central government’s objective to decrease its debt-to-GDP ratio is critical for boosting investor confidence and enhancing the country’s standing in global capital markets. As cited by Fitch, achieving a stronger credit rating would provide both the government and private sector with cheaper access to funds, which is essential for sustaining long-term economic growth.
In terms of economic performance, Fitch has projected that India’s economy will grow by 6.5% in FY26, a figure echoed by the Reserve Bank of India. This growth is attributed to resilient domestic demand coupled with increasing public capital expenditure and stable private consumption—a dynamic that raises hopes for sustained economic expansion. However, the agency has also indicated a potential slowdown in nominal GDP growth from 12% in FY24 to 9% in FY26, raising questions about the overall momentum of the Indian economy.
Risks on the Horizon: Trade Frictions and Investment Sentiment
India’s economic landscape is not without its challenges, particularly when it comes to external trade dynamics. The ongoing trade tensions, particularly with the United States, pose significant risks. Fitch notes that proposed tariffs could dampen investment sentiment, especially if there are substantial taxes on Indian goods. Although exports to the U.S. currently account for only 2% of GDP, the uncertainty stemming from potential tariffs could negatively impact investor confidence and India’s efforts to capitalize on supply-chain shifts away from China.
Moreover, Fitch’s report suggests that India may need to enhance its internal policies, including potential reforms to the Goods and Services Tax (GST), to support consumption. Such changes could help mitigate some growth risks, allowing India to better navigate the evolving global economic landscape.
Conclusion: A Strong Future Despite Hurdles
Economists and policymakers generally remain optimistic about India’s credit outlook, pointing to the nation’s fundamentals and fiscal discipline as driving factors behind its current rating. While the road ahead has its share of obstacles—especially regarding debt levels and external trade dynamics—India’s robust growth potential continues to inspire confidence in its economic trajectory.
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Original source: www.livemint.com
