Fitch's rating disappointing but investors see future in India, its reforms

 India's economy can expect a minimum rating of A given that all debt is in rupees and there is no external risk posed.

The business of rating is very subjective, especially when it comes to sovereigns. Fitch has retained the rating of India at BBB- but given a negative outlook compared to the other two agencies that think it is stable. Hence, Fitch’s view comes as a disappointment for sure.

India is probably going to be one of the best-performing economies in the world this year. This has been done without the government going in for excessive fiscal spending as the western nations have done. This factor has been appreciated by S&P and Moody. The way in which we have rebounded has been remarkable, with the government following a rather unique route since the pandemic began of ushering in some tough reforms in the last 18 months. It has been ably supported by the Reserve Bank of India (RBI).

Fitch’s main grievance appears to be on the side of public debt, which admittedly is high compared to the median of comparable countries. Ideally, credit rating agencies (CRA) need to give more weight to the underlying as well as the efforts being put to get things back on the rail. The Union Budget has laid down the fiscal path for the center and this is also being pursued by the states under the revised FRBM guidelines. The focus has been on galvanizing investment as seen by the higher CAPEX. There have been limited giveaways on the tax front and the government has taken the bold step of not compromising mulch on taxes on fuel. To top it all, the asset monetization plan lays down the roadmap for revenue to be garnered and the sale of Air India bears testimony to the urgency of disinvestment. Hence, we do have reason to be disappointed in the view taken by the CRA.

Notwithstanding the view taken by these rating agencies, the relentless flow of foreign direct investment (FDI) is a vindication of reforms and how investors see India and its future. The government has ushered in reforms that have the potential to change the landscape in the medium term. The balance of payments has been positive as seen in the continuous growth of forex reserves with exports riding the wave of global trade.