MUMBAI: A week after its larger peer S&P upgraded the country’s ratings to BBB with stable outlook—after holding a BBB- rating for 18 years, Fitch Ratings has chosen to remain in status quo to affirm the BBB- ratings with stable outlook, despite citing the robust growth and solid external finances of the country.
The agency on Monday also said demand growth is seen solid, aided by government capex and private consumption and projected a robust 6.5% growth for FY26 on the back of the GST and other reforms.
“The proposed GST reforms should support consumption and offset growth risks arising from the higher US tariffs,” it said, adding however, the debt burden will be a reason for credit weakness.
“The ratings are supported by the robust growth and solid external finances of the country, with growth along with macro stability and improving fiscal credibility driving a steady improvement in its structural metrics, including GDP per capita,” Fitch said, adding these reforms can increase the likelihood that the country’s debt can trend modestly downward in the medium term.
It also expressed the hope that governments in New Delhi and Washington will negotiate to bring the tariffs lower eventually and said the “US tariffs are a moderate downside risk” to its forecast as the higher duties add to the uncertainty.
The agency however, believes that “50% tariff on New Delhi will eventually be negotiated lower”."US tariffs are a moderate downside risk to our forecast but are subject to a high degree of uncertainty. The Trump administration is planning to impose a 50% headline tariff on India by from August 27, although we believe this will eventually be negotiated lower," Fitch said.
"The direct impact on GDP will be modest as exports to the US account for 2% of GDP, but tariff uncertainty will dampen business sentiment and investment," Fitch said.
The note added that the country’s ability to benefit from the China+1 shift would be 'reduced' if the tariffs remain above those of India’s Asian peers. However, the proposed GST reforms, should support consumption and offset growth risks, it added. On how the proposed GST reforms and others mentioned by the prime minister on August 15, Fitch said it sees a potential growth of 6.4% driven by public capex, revival in private investments and favourable demographics.
"The deregulation agenda and GST reforms should support incremental growth. Passage of other significant reforms, especially on land and labour laws, seems politically difficult," Fitch said, though adding some states are likely to speed up such reforms. Despite the bilateral trade agreements, India's trade barriers still remain relatively high,” Fitch said.
Fitch said the country’s economic outlook remains “strong” compared to its peers, even though the growth momentum has moderated in the past two years."Domestic demand will remain solid, underpinned by the ongoing public capex drive and steady private consumption. However, private investment is likely to remain moderate, particularly given the heightened US tariff risks," the note said.
The agency, however, said the country’s fiscal metrics are a “credit weakness”, with high deficits, debt and debt service compared with its ‘BBB' peers. The lagging structural metrics of governance indicators and GDP per capita too are a constraint on the rating.
Fitch cited two key factors--sustainability of high medium-term growth along with an improved private investment cycle, and a commitment to keep government debt on a steady downward trend-- could lead to a rating upgrade going forward.
On the other hand, a stalled fiscal consolidation or a rise in debt/GDP ratio, or a weaker GDP growth outlook that weighs on the debt trajectory, could lead to a rating downgrade.
Fitch sees a modest fiscal deficit reduction going forward, declining to 4.4% of GDP in FY26, which may start to slow down from next fiscal, with a fall to 4.2% in FY27 and 4.1% in FY28. "Capex is likely to stay high and the current Pay Commission review will increase civil servant salaries amid more limited space for subsidy cuts and the potential for slightly revenue-negative GST reforms," Fitch said.