Risk Category: Economic Risk
Introduction
Fitch Ratings, in its quarterly Global Economic Outlook (GEO) report, revised India’s GDP forecast in the current fiscal year 2024-25 from 7% to 7.2% even as the Reserve Bank of India (RBI) is expected to cut policy interest rates only by 25 basis points to 6.25 per cent. The rating agency also expects recovery in consumer spending and consumer confidence, with increased investments. The report comes amid the backdrop of Moody’s ratings agency’s bleak prospects for Indian fiscal policy of the newly elected government. While Moody’s forecast reflects concerns for India’s fiscal consolidation path and investments, Fitch Ratings outlook for India’s economic growth renews confidence in investments.
Analyst Comments
Fitch rates creditworthiness of companies and countries, and rates the viability of investments relative to the likelihood of default. Fitch is one of the top three credit rating agencies internationally, along with Moody’s and Standard & Poor’s.
Fitch’s estimates are in line with that of RBI which earlier this month projected the Indian economy to expand 7.2 per cent in the current fiscal year given the improving rural demand and moderating inflation. The rating agency highlighted that falling indirect taxes and subsidies have contributed to higher GDP growth. Fitch anticipates that investment will continue to rise during Prime Minister Narendra Modi’s third term, albeit slower than in recent quarters. An ‘above normal’ monsoon forecast for June-September is expected to mitigate risks of food price spikes. Fitch projects that headline inflation in India will decrease to 4.5% by the end of 2024, averaging 4.3% in 2025 and 2026 as the RBI aims to reduce retail inflation to its 4% target.
In contrast to Moody’s forecasts on India’s fiscal consolidation trajectory in anticipation of populist policies and its impact on investments, Fitch’s estimates on investments and consumer spending are based on emerging trends. According to a note by UBS (global wealth management firm), the Modi-led coalition government at the center will remain on the fiscal consolidation path. The firm said the government will target a fiscal deficit of 5.1 percent of GDP in FY 24-25 and reduce it to below 4.5 percent by FY26. The government is also expected to keep its focus on macro stability and policy continuity. Furthermore, budget 2024 is expected to introduce reforms to the income tax structure in India, focusing on reducing taxes for lower income brackets, to stimulate consumption. The Indian Express reports that the government may prioritize tax cuts over increased welfare spending in July’s budget announcement.
With anticipated tax cuts and declining inflation, consumer spending and confidence is expected to grow. Those coupled with continued fiscal consolidation as well as macro stability and policy continuity, are expected to drive private and foreign direct investments. Despite concerns regarding welfare/populist spending, adverse weather, and monetary tightening, an upturn in economic growth is predicted.
