Home / Economy / Fitch slashes India's GDP forecast to 8.7% for FY22
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Fitch Ratings on Thursday slashed its FY22 growth forecast for India to 8.7% from 10% estimated in June anticipating that the severe impact of the second wave of coronavirus pandemic would delay economic recovery in Asia’s third largest economy.  

 “We further lowered India’s GDP forecast for the fiscal year ending March 2022 (FY22) to 8.7% from 10.0% in June as a result of the severe second virus wave. In our view, however, the impact of the second wave was to delay rather than derail India’s economic recovery. High frequency indicators point to a strong rebound in 2Q FY22, as business activity has again returned to pre-pandemic levels," Fitch said in its Asia Pacific Sovereign Credit Overview. 

The World Bank and Moody’s have projected Indian economy to grow at 8.3% and 9.3% respectively while the Reserve Bank of India has pegged GDP growth to 9.5% for FY22.  

Fitch Ratings has assigned India lowest investment grade credit rating with negative outlook. The rating agency on Thursday said India's rating balances a still-strong medium-term growth outlook and external resilience from solid foreign- reserve buffers, against high public debt, a weak financial sector and some lagging structural factors. “The negative outlook reflects uncertainty over the debt trajectory following the sharp deterioration in India's public finances due to the pandemic shock. Wider fiscal deficits and government plans for only a gradual consolidation put greater onus on India's ability to return to high GDP growth over the medium term to lower the debt ratio," it added.  

The rating agency has forecast central government fiscal deficit to be 7.2% of GDP excluding disinvestment receipts. “The government on 28 June 2021 announced a fiscal package worth about 2.7% of GDP. Much of this consists of loan guarantees, with only 0.6% of GDP in higher on budget spending. However, buoyant revenue performance largely offsets the higher spending and should help contain the fiscal deficit," it added.   

Fitch said it expects inflation to moderate, which should allow the Reserve Bank of India’s (RBI) to keep rates on hold until the next fiscal year. “Inflation has hovered around the upper end of the RBI target inflation band of 2%-6% for the past several months, as commodity pressure raised prices. The RBI has kept its repo rate at 4% since March 2020, as it has focused on supporting the economy and regards the pressure as temporary," it said.   

Fitch cautioned that failure to reduce sufficiently the fiscal deficit to a level consistent with putting the general government debt/GDP ratio on a downward trajectory and a structurally weaker real GDP growth outlook, for instance, due to continued financial sector weakness or reform implementation that is lacking, which weighs further on the debt trajectory could put downward pressure on India’s sovereign rating.  

However, it added that implementation of a credible medium-term fiscal strategy to bring general government debt down after the pandemic towards the levels of 'BBB' category peers and higher sustained investment and growth rates in the medium term without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector could prove positive for India’s sovereign credit rating. 

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