'India’s medium-term growth performance to be 6.2% through FY28, despite NDA’s slimmer majority': Fitch Ratings

Leading credit rating agency Fitch Ratings in a report said that the National Democratic Alliance (NDA) appears set to retain power with a narrower majority after the recent Lok Sabha election, following a weaker performance by its dominant member, the Bharatiya Janata Party (BJP). But despite the changes in the government, the outcome should support broad policy continuity. The government should continue to prioritise infrastructure capex, improvements to the business environment, and gradual fiscal consolidation, the ratings agency said.

It said that despite a coalition government, the growth will remain rapid at 7% in FY25. The NDA government increased public infrastructure investment significantly, helping to put India among the fastest-growing major economies in recent years, with real GDP growth reaching 8.2% in the fiscal year ending March 2024 (FY24).

The report said that the government’s losses at the ballot box should not lead to substantial policy adjustments, but the post-election budget in July should provide greater clarity on its economic reform priorities and fiscal plans over the coming five years.

"We expect India’s medium-term growth performance to remain around our trend estimate of 6.2% through FY28, despite the government’s slimmer majority. The continued public capex drive to address infrastructure gaps, ongoing digitalisation efforts, and improved bank and corporate balance sheets - relative to the pre-pandemic situation - should facilitate a strong outlook for private investment," Fitch Ratings said.

It added: "We also expect the Production-Linked Incentives scheme to remain intact, which will help to attract FDI in target sectors, such as electronics. However, private investment has not yet accelerated meaningfully, which represents a risk for the outlook."

The ratings agency said the NDA government will hopefully remain focused on its agendas, like labour laws and pushing the manufacturing sector further. 

"We believe major reforms to land and labour laws will remain on the new government’s agenda as it seeks to enhance India’s manufacturing sector, but these have long been contentious and the NDA’s weaker mandate will complicate their passage further. This could reduce the potential upside to India’s medium-term growth prospects. However, we believe such reforms will continue to advance at the state level in some parts of the country. There is also some potential for judicial reforms that would look to lower costs and speed resolution of court cases," the report said. 

The report said weaker fiscal metrics relative to peers are a significant constraint for India’s sovereign rating, which affirmed at ‘BBB-’ with a Stable Outlook in January 2024. 

"The next government’s ability to address high fiscal deficits and reduce debt will be important considerations for the rating in the next few years. Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term."

"The government has improved its record on achieving deficit targets and has advanced fiscal consolidation gradually over the past few years. We expect this focus on gradual consolidation to broadly be sustained. The FY24 budget deficit came in at 5.6% of GDP, below the revised budget estimate of 5.8% (which matched Fitch’s estimate). We also expect the 5.1% deficit target for FY25 to be attained. The government’s goal of reducing the deficit to 4.5% of GDP in FY26 appears increasingly achievable, although the election marginally increases risks of higher spending or slippage in capex to accommodate greater social spending," it added.