NEW DELHI: India’s economy will grow 7.3% in the current financial year and gain pace to 7.5% next year as the “temporary drag” from demonetisation and the goods and services tax fades away, Fitch Ratings forecast.
The rating company reaffirmed India’s ‘BBB-’ rating with a stable outlook as it pointed to India’s growth potential and lauded the Reserve Bank of India’s monetary management. Fitch said GST is an important reform that would support growth in the medium term when teething issues dissipate.
“India’s five-year average real GDP growth of 7.1% is the highest in the APAC region and among ‘BBB’ range peers. Growth has the potential to remain high for a substantial period of time, as convergence with more developed economies can be expected,” Fitch said in a statement from Hong Kong. “India has the highest mediumterm growth potential among the largest emerging markets.”
Monetary tightening could be brought forward, it warned, if government policies such as higher minimum support prices and increase in customs duty on certain products push up inflation expectations.
“The Reserve Bank of India is building a solid monetary policy record, as consumer price inflation has been well within the target range of 4% +/- 2% since the inception of the Monetary Policy Committee in October 2016,” it said.
India’s relatively strong external buffers and the comparatively closed nature of its economy make the country less vulnerable to external shocks than many of its peers, Fitch said, taking note of the country’s 30-rank rise in the World Bank’s ease of doing business rankings.
“India’s rating balances a strong medium-term growth outlook and favourable external balances with weak fiscal finances and some lagging structural factors, including governance standards and a still-difficult, but improving, business environment,” Fitch said, justifying its decision to hold the ratings.
Despite vastly improved macros, Fitch and Standard & Poor’s have not upgraded India from the lowest investment grade rating. Moody’s Investors Service raised India’s rating one notch in November last year, after a gap of 14 years.
“Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings,” Fitch said, pointing to fiscal slippage against budget targets.
“The government has reasserted its longer-term aim of gradual fiscal consolidation with an amendment of the FRBM Act (Fiscal Responsibility and Budget Management Act) to set a ceiling for central government debt at 40% of GDP and general government debt at 60% of GDP, to be reached by March 2025,” it said of the new targets. “This is a positive step towards a more prudent fiscal framework, if eventually adhered to.”
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