"India's relatively weak business environment and standards of governance are gradually improving as a result of the pursued reforms, but obstacles faced by investors, including infrastructure bottlenecks, have not been reduced overnight," it said. The agency said while India's sovereign ratings continued to be constrained by the limited fiscal space of the government, the 23.6-percent salary hike recommended by the 7th Pay Commission has raised doubts about the feasibility of the medium-term consolidation path.
On inflation, it said, India's 7.9-percent average in annual price rise over the past five years was much higher than the 3.3-percent level among the peers with the same rating. But the changes in the retail inflation profile strengthened India's sovereign credit profile. Furthermore, the global ratings agency pointed out that India is not immune to external shocks, but seems less vulnerable than many of its peers due to narrow current-account deficit and a build-up of reserves. "The external balances are also likely to be strengthened by a continued rise in FDI (foreign direct investment) inflows driven by strong reform and growth momentum," Fitch said. Besides strong FDI inflows, Fitch said, India is less vulnerable than many peers to a potential slowdown in China. The country has a more domestically based economy and it is not part of the Asian supply chain. However, Fitch cautioned over the ability of the public sector banks to internally generate capital to make a smooth transition towards 'Basel III' levels by 2019-2020.
"It remains to be seen if the government's planned capital infusion of Rs.700 billion into the public sector banks will be adequate in light of supervisory norms and weak equity valuations," the ratings agency said. In addition, it elaborated that the Indian economy is less developed on a number of metrics than its peers like low ranking on the United Nations Human Development Index.