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Fitch and Moody’s Investors Service have negative outlook for India, while S&P Global Ratings has a stable outlook Photo: Bloomberg
Fitch and Moody’s Investors Service have negative outlook for India, while S&P Global Ratings has a stable outlook Photo: Bloomberg

Fitch cuts India outlook to negative, retains BBB- rating

  • The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden
  • Fitch expects economic activity to contract by 5% in the fiscal year ending March 2021

NEW DELHI: Fitch Ratings on Thursday revised downward its rating outlook for India to negative from stable while retaining its sovereign rating at the lowest investment grade of 'BBB-', citing increasing risk to the country’s growth and debt outlook.

While all three rating agencies now have the lowest investment grade rating for India, Fitch and Moody’s have negative outlook while S&P Global Ratings has stable outlook.

“The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden," Fitch said in a statement.

This may come as a surprise to the government as earlier this month, chief economic adviser in the finance ministry expressed happiness citing a Fitch report which said it expects government’s debt to GDP ratio to decline in the medium term.

All three major rating agencies have now taken rating action within days from each other. While Moody’s Investors Service downgraded India’s rating a notch to the lowest investment grade with negative outlook, S&P Global Ratings retained its lowest investment grade rating with stable outlook holding that it expects the country’s economy and fiscal position to stabilize and begin to recover from 2021 onwards.

Separately, the Asian Development Bank on Thursday said the Indian economy will contract by 4% in FY21 as businesses came to a standstill for more than two months because of a nationwide lockdown. In April, ADB has projected India’s economy to grow at 4% in FY21.

In FY22, the development bank expects Asia’s third largest economy to bounce back to grow at 5% as economic activity normalizes gradually.

Fitch expects the Indian economy to contract by 5% in FY21 from the strict lockdown measures imposed since 25 March 2020, before rebounding by 9.5% in FY22, mainly driven by a low-base effect.

“Our forecasts are subject to considerable risks due to the continued acceleration in the number of new covid-19 cases as the lockdown is eased gradually. It remains to be seen whether India can return to sustained growth rates of 6% to 7% as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector," Fitch said in a statement.

The rating agency said India’s fiscal metrics have deteriorated significantly, notwithstanding the government's expenditure restraint, due to the impact of the severe growth slowdown on revenue, the fiscal deficit and public-sector debt ratios.

“Fitch expects general government debt to jump to 84.5% of GDP in FY21 from an estimated 71.0% of GDP in FY20. This is significantly higher than the median of 42.2% of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6% for 2020. The medium-term fiscal outlook is of particular importance from a rating perspective, but is subject to great uncertainty and will depend on the level of GDP growth and the government's policy intentions," it added.

Fitch said the government has announced a slew of structural reforms as part of its response to the pandemic to strengthen GDP growth over the medium term, which, if successful, could improve India's fiscal position.

“Reforms to improve the efficiency of agricultural supply chains could help reduce food prices and swings in inflation, with food prices accounting for almost half of the CPI basket. The intention to privatise state-owned enterprises (SOE) could also be transformative, depending on the details, the willingness of the government to sell stakes of over 50%, and the demand for these assets in the current environment. The combined debt of around 200 SOEs owned by the central government amounts to 6.7% of GDP, but such information is unavailable for the around 800 SOEs owned by state governments," it added.

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