OREANDA-NEWS. Fitch Ratings has affirmed India's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-'. The issue ratings on India's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BBB-' and the Short-Term Foreign-Currency IDR at 'F3'.

KEY RATING DRIVERS
Fitch's affirmation of India's sovereign ratings and Stable Outlook balances a strong medium-term GDP growth outlook and favourable external finances, including a strong foreign reserves buffer, with a high government debt burden and weak structural features, including a difficult - but improving - business environment.

India's positive GDP growth outlook stands out globally. Fitch forecasts India's real GDP growth to accelerate to 7.5% in the fiscal year ending 31 March 2016 (FY16) and 8.0% in FY17, from 7.3% in FY15, supported by the government's beefed-up capex spending and gradual implementation of a broad-based structural reform agenda. The Reserve Bank of India's (RBI) policy rate cuts of 125bp in total in 2015 are also likely to contribute to higher GDP growth, even though monetary transmission is impaired by relatively weak banking sector balance sheets. India's real GDP growth averaged 6.7% over the past five years, which is considerably higher than the 'BBB' range median of 3.0%, and it remains so even if the uplift in growth resulting from the GDP data revision by the Central Statistical Office in February 2015 is discounted.

The government continues to steadily roll out its ambitious structural reform agenda, as illustrated in recent months by the announcement of new reforms that will likely improve the business environment, including changes in the foreign direct investment (FDI) regime. It has so far turned out difficult for the government to garner the required support in the Upper House (Rajya Sabha) for some big ticket reforms, including a national Goods and Services Tax, but those reforms that only require executive approval continue to be implemented and legislative reforms can still be pursued at the state level.

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. India moved up four places in the World Bank's Ease of Doing Business rankings in 2015, but is still the worst-performing of all 'BBB' range sovereigns at 130th out of 189 countries. Translation of structural reforms into improved indicators and higher real GDP growth depends on actual implementation.

India's sovereign ratings continue to be constrained by limited improvement in its fiscal position. The seventh Pay Commission's recommendation of a 23.6% increase in remuneration for central government employees raises doubts about the feasibility of the medium-term consolidation path without any new revenue-generating measures. Fitch expects a general government fiscal deficit, including both the central government and the states, of 6.7% in FY16, more than double the 'BBB' peer median of 2.8%. Fitch expects the general government debt burden to rise to 68.8% of GDP in FY16 from 66.8% in FY15, one of the highest of 'BBB' range sovereigns and far off the 'BBB' category median of 42.8% of GDP. The increase largely results from state governments taking part of the power distribution companies' debt onto their own balance sheets, a reform which overall is considered credit positive, as it is accompanied by reinforced incentives for states to improve the functioning of these companies.

Inflation in India averaged 7.9% over the past five years, comparing unfavourably with the 'BBB' peer median of 3.3%. However, a structural reduction in the consumer price inflation level, likely supported by the monetary policy framework changes in February 2015, strengthens India's sovereign credit profile. The RBI's monetary policy track record is reinforced by inflation turning out broadly in line with its targeted glide path. Generally favourable international oil and food price developments allowed the RBI to loosen monetary policy without, as it seemed, risking a breach of the inflation targets in the near future. The government's decision to limit minimum support price rises for agricultural products helped to keep inflation under control.

India is not immune to external shocks, but seems less vulnerable than many of its peers. External vulnerabilities have reduced substantially in the past two years, particularly its narrowed current-account deficit, which Fitch expects to reach 1.1% in FY16 compared with the 'BBB' median of 5.6%, and a build-up of reserves to 7.7 months of current external payments. The external balances are also likely to be strengthened by a continued rise in FDI inflows driven by strong reform and growth momentum. India is also less vulnerable than many peers to a potential severe slowdown in China, as bilateral trade between the two countries is limited (3.6% of India's exports in FY15 and 7.8% if Hong Kong is included) and India's more domestically based economy is not part of the Asian supply chain.

The Indian economy is less developed on a number of metrics than its peers. Its ranking on the United Nations Human Development Index indicates relatively low basic human development, while average per capita income remaining low at USD1,669 in 2015 compared with the 'BBB' range median of USD9,145.

Public sector banks form a contingent liability for the government's finances in the years ahead. The banking sector's non-performing loans, which Fitch expects to reach 4.9% of total assets in FY16, are likely to hamper banks' ability to internally generate capital at a time when they will require capital to transition towards Basel III by FY19. It remains to be seen if the government's planned capital infusion of INR700bn into the public sector banks will be adequate in light of supervisory norms and weak equity valuations.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's view that upside and downside risks to the ratings are
balanced. The main factors that individually or collectively could lead to positive rating action are:

- Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected in the medium term
- An improved business environment resulting from implemented reforms and persistently contained inflation, which would support higher investment and real GDP growth

The main factors that individually or collectively could lead to negative rating action are:

- Deviation from the fiscal consolidation path, causing the already high public debt burden to deviate further from the median, or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale financial support from the sovereign
- Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current account deficit, which would increase the risk of external funding stress

KEY ASSUMPTIONS
- The global economy performs broadly in line with Fitch's Global Economic Outlook, including average Brent oil price assumptions of USD55 per barrel in 2015 and 2016 and USD65 in 2017.
- Economic activity will not be seriously disrupted by materialising political risk, for instance related to social unrest, separatist movements, terrorism or insurgent groups like the Naxalites