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Business News/ News / India/  Covid impact: Fitch affirms BBB- sovereign rating for India; outlook negative

Covid impact: Fitch affirms BBB- sovereign rating for India; outlook negative

Fitch forecasts a 12.8% recovery in India's GDP in FY22, moderating to 5.8% in FY23, from an estimated contraction of 7.5% in FY21

(Photo: Bloomberg)Premium
(Photo: Bloomberg)

Fitch Ratings has affirmed BBB- sovereign rating for India with a negative outlook, saying that second wave of novel coronavirus may delay economic recovery.

"The Negative Outlook reflects lingering uncertainty around the debt trajectory following the sharp deterioration in India's public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom. Wider fiscal deficits, and government plans for only a gradual narrowing of the deficit, put greater onus on India's ability to return to high levels of GDP growth over the medium term to stabilise and bring down the debt ratio," Fitch said in a statement.

Fitch also said that it forecasts a 12.8% recovery in India's gross domestic product (GDP) in the fiscal year ending March 2022 (FY22), moderating to 5.8% in FY23, from an estimated contraction of 7.5% in FY21. However, a recent surge in coronavirus cases poses increasing downside risks to the FY22 outlook, it added. "This second wave of virus cases may delay the recovery, but it is unlikely in Fitch's view to derail it."

Moreover, Fitch said that the strong rebound in 2HFY21 and ongoing policy support underpin our expectations for a recovery.

It expected pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in 2020, and the vaccine rollout has been stepped up.

It added that fiscal metrics have deteriorated sharply in the context of the macroeconomic shock and efforts to support health outcomes and the economic recovery.

It estimates that a general government deficit of 14.0% of GDP in FY21 (excluding divestment) from 7.3% in FY20, consistent with a deficit of 9.5% for the central government. Notably, part of the increase in the FY21 deficit (around 1.5% of GDP) reflects increased transparency by bringing off-budget spending on budget. The government is repaying loans to the Food Corporation of India from the National Small Savings Fund and then to keep such subsidy spending on-budget, it said.

"We expect the general government deficit to narrow to 10.8% of GDP (7.1% central government), on the basis of our expectations of growth recovery and strong revenue performance in 2HFY21."It also says expect inflation to decline to an average of 4.4% in FY22, after hovering above Reserve Bank of India's 2%-6% target band for much of FY21.

It also said that it expects India's potential growth to remain robust relative to 'BBB' peers at around 6.5%. The government remains reform-minded, evidenced by the passing of agricultural and labour market reforms in November. These reforms could lift growth if implementation risks are addressed, particularly for the agricultural reforms which have met stiff resistance by farmers, the report added.

The Production-Linked Incentives scheme to attract FDI and planned increase in public capex could boost private sector investment, it said.

Fitch also pointed out the weaknesses in India's financial sector pose a risk to medium-term outlook. It has proposed injection in recent budget of 20,000 crore of new capital into state banks likely to prove insufficient to alleviate stress.

Meanwhile, India recorded 3,12,731 new infections in 24 hours - the highest daily case count in a single country since the virus surfaced in China more than a year ago. Over the past two months, the outbreak in India has exploded, with reports of superspreader gatherings, oxygen shortages and medicine shortages.

The death toll has also climbed to record 2,104.

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Updated: 22 Apr 2021, 08:43 PM IST
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