The global rating agency listed as positive developments, a range of decisions taken by the government, from changes in the laws governing the agriculture sector and the passage of new labour codes to the privatisation drive of state owned enterprises (SOEs) among others.
Fitch expects the government to stay reform-minded over the next few years, at both the central and state level, but added that implementation risks were significant.
Most notable of the recently passed legislations was the decision to give farmers more flexibility over where to sell their produce, the note said.
“Stripping out middle men, as the reform allows, could improve farmer incomes while reducing consumer prices. Nevertheless, implementation risks are significant,” it said.
The agency also took note of the new labour codes, which among other things increased the threshold to 300 workers from 100, for employers to seek government approval for layoffs.
“These changes could support formalisation of India’s labour market and improve its flexibility, with positive efficiency gains, but our assumption is that in practice their impact will be modest,” Fitch said.
The government’s move to privatise SOEs, which included some 200 central government-owned and about 800 state government-owned enterprises, would be transformative, it said.
“However, it remains unclear whether the government plans to surrender its majority control. The strength of market demand for state assets is also yet to be tested,” it added.
The Indian government relies heavily on expectations of sustained rapid nominal GDP growth to keep its public debt ratio and broader public finances under control, Fitch said, adding that the pandemic will slow medium term growth as damaged corporate balance sheets will dampen investment for years.
The note also highlighted that the renewed asset quality challenges in banks and generally fragile liquidity for non-bank financial companies could also constrain growth prospects and jeopardise the stability of the medium-term government debt-to-GDP trajectory.
Fitch noted that the country’s GDP growth outlook was a key rating sensitivity when it revised the outlook on India’s BBB- sovereign credit rating to negative from stable in June.
According to Fitch, the mentioned reforms would support investment and boost productivity, however, the government’s decision to open up more sectors to foreign direct investment was contrasted by the raising of trade barriers and withdrawal from the Regional Comprehensive Economic Partnership.
Further, two landmark previous reforms faced setbacks as “The Insolvency and Bankruptcy Code has been suspended temporarily in line with forbearance regulations for banks, while a decline in inflows from the Goods and Services Tax will make it more challenging to divide these revenues among the centre and the states,” it said.