Fitch retains India’s rating at BBB-, says GST reforms ‘slightly revenue-negative’

Ratings are divided into two rough classes: investment and speculative grades. Entities, including countries, in the former class are worth investing in, while repayment of loans taken by those in the latter is more difficult to predict. Within investment grade, there are several levels, with BBB being the lowest. At BBB-, Fitch’s rating on India is the lowest possible investment-grade rating, although the outlook on the rating is stable.

According to Fitch, India’s general government debt – which combines that of the Centre and the states – is expected to inch up in 2025-26 to 81.5 per cent of GDP from 80.9 per cent in 2024-25 due to a decline in nominal GDP growth. As per the latest Union Budget presented on February 1, the finance ministry expects India’s nominal GDP growth – or growth without adjusting for inflation – to grow by 10.1 per cent in 2025-26. Fitch expects it to come in at 9 per cent.

In 2024-25, India’s nominal GDP growth had slipped to 9.8 per cent from 12 per cent the previous year.

“We expect debt to follow only a modest downward trend to 78.5 per cent by FY30, even as nominal growth recovers to 10.5 per cent. If nominal growth persists at below 10 per cent, debt reduction could become challenging,” Fitch analysts said in a statement on Monday.

India’s peers in Fitch’s BBB category of rating have a median debt-to-GDP ratio of 59.6 per cent. The Indian government has targeted a reduction in its debt-to-GDP ratio to 49-51 per cent by 2030-31 from 57.1 per cent in 2024-25. States do not have a debt target. Rating agencies view government debt on a consolidated basis – Centre plus states.

To be sure, Fitch noted that the credibility of the Indian government’s finances had improved in recent years, with the quality of its spending also rising due to a focus on capital expenditure, and a “demonstrated commitment” to steadily reduce the annual fiscal deficit, which is slated to come down by 40 basis points (bps) to 4.4 per cent of GDP this fiscal. Fitch expects the government to meet this target.

However, from next year, the annual deficit reduction is expected to slow down, with Fitch predicting it will edge down only by 20 bps in 2026-27 to 4.2 per cent and then by an additional 10 bps in 2027-28.

“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. A shock could lead to slippage, but the CG (central government) has shown a preference to keep deficits contained,” Fitch said.

‘Strengthening’ economic record

On the GDP front, Fitch said India’s record of delivering growth with macroeconomic stability and improving fiscal credibility was “strengthening”. Relative to its peers, the country’s economic outlook “remains strong” despite the recent moderation in momentum that has led to real GDP growth falling to a four-year low of 6.5 per cent in 2024-25. While Fitch expects the Indian economy to grow at the same rate this year too, it would be significantly higher than the BBB median of 2.5 per cent.

“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 heightened US tariff risks,” Fitch analysts said.

On the tariff front, while the duties imposed by the US – set to double to 50 per cent from August 27 – on Indian goods create a “moderate downside risk” to Fitch’s forecast, it expects the rate to “eventually be negotiated lower”.

Fitch pegged India’s potential GDP growth rate at 6.4 per cent, although the government’s deregulation agenda and GST reforms “should support incremental growth. Passage of other significant reforms, especially on land and labour laws, seems politically difficult. Still, some state governments are likely to advance such reforms”.

Like S&P, Fitch made note of the Reserve Bank of India’s (RBI) work in keeping inflation under control. As per latest data, India’s headline retail inflation fell to 1.55 per cent in July – the second-lowest print on record. The Indian central bank expects retail inflation to average 3.1 per cent in 2025-26, which would be 150 bps lower than in 2024-25.