NEW DELHI :
Fitch Ratings on Monday said though the recent tensions on India’s border do not pose an immediate threat to the country’s sovereign rating, it should not distract the government from undertaking economic reforms.
“Most recent (border) situation in India does not impact its credit profile immediately. However, to what extent the government will be distracted by these events from economic reforms is a question," analysts of Fitch Ratings said at a webinar after the rating agency revised its outlook for India to negative from stable last week, while keeping the sovereign rating unchanged at the lowest investment grade.
In the bloodiest clash in 45 years, security forces of China and India clashed on the Line of Actual Control (LAC) last week in which 20 Indian army personnel were killed.
In its rating action on Thursday, Fitch said geopolitical risks related to longstanding border issues with India’s neighbours were highlighted again by the tensions with China. “Relations with Pakistan are, moreover, negatively affected by the repeal of the special status for Kashmir and recent changes to the status of illegal immigrants based on their religion. A stronger focus by the ruling Bharatiya Janata Party on its Hindu-nationalist agenda since the government’s re-election in May 2019 risks becoming a distraction for economic reform implementation and could further raise social tensions."
Last week, Fitch said structural reforms could lift growth, hailing recent government measures, such as improving the efficiency of agricultural supply chains, which could help reduce food prices and swings in inflation.
Explaining its rating sensitivities, Fitch on Monday said factors that could individually or collectively lead to negative rating action include a structurally weaker real gross domestic product (GDP) growth outlook due to continued financial-sector weakness or reform implementation; and failure to reduce the fiscal deficit after the pandemic recedes, putting the general government debt-to-GDP ratio on a downward trajectory.
However, Fitch said measures like implementation of a credible strategy to reduce general government debt after the pandemic, 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 lead to positive rating action for India.
Fitch said while the Centre has provided fiscal stimulus of around 1% of GDP so far, it has to some extent factored in more stimulus measures in coming days in its rating action. “Most likely, government has to spent a bit more through more relief measures. In our forecast we have factored in a larger stimulus package, not just the 1% announced so far. Another stimulus may come in months ahead for the needy."
The rating agency expects the Indian economy to contract by 5% in FY21 before rebounding by 9.5% in FY22, mainly driven by a low-base effect. It has projected general government debt to jump to 84.5% of the GDP in FY21 from an estimated 71% of the GDP in FY20.