Raising concerns over the government high support for banks, credit rating agency, Fitch ratings in its latest report has said that the government’s excessive backing to banks in order to deal with stressed assets and loose macro-economic policy that could stoke inflation, would prove ‘negative’ for Indian economy. However, the agency noted that government's fiscal initiatives would help the country to reduce debt burden more rapidly than expected in the medium term.
Fitch ratings in its ‘Asia-Pacific Sovereign Overview for April-June quarter’ report further said that further deviation of the already-high public-debt burden from the peer median, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale sovereign financial support...(are) negative sensitivities.
The rating agency further said that loose macroeconomic policy settings that cause a return of persistently high inflation and a widening current-account deficit, would increase the risk of external funding stress. However, it said that an improved business environment resulting from implemented reforms and persistently contained inflation, would support higher private investment and real GDP growth would be positive. Besides, demonetisation could help boost government revenue by moving economic activity from the informal to the formal sector, although withdrawal of high-value currency created a cash crunch, hurting economic activity in the short term.
Fitch has Fitch has a 'BBB-minus', the lowest investment-grade rating on India with a 'stable' outlook. It has rated India as stable on account of strong medium-term growth outlook and favourable external balances against weak fiscal position and a business environment which is still difficult.