“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.