Further deterioration in fiscal outlook could pressure India’s sovereign rating
Hong Kong, April 28 (ANI): Fitch Ratings has again revised down its economic growth forecast for India to 0.8 per cent in the fiscal year ending March 2021, reflecting the impact of the coronavirus pandemic and official efforts to contain it. “This is down sharply from our forecast of 5.6 per cent prior to the outbreak.
We expect growth to rebound to 6.7 per cent in FY22 but there is a risk that the crisis could amplify fiscal and financial sector strains and hurt the country’s growth prospects over the medium term,” it said. Indian authorities have extended a nationwide lockdown designed to curb the spread of the coronavirus until May 3.
The restrictions in place since March 25 are relatively tight, banning non-essential business and imposing strict controls on transport. However, there has been some recent relaxation, permitting the resumption of limited manufacturing and agricultural activity.
Fitch affirmed India’s rating at BBB-minus with a stable outlook in December 2019 before the onset of coronavirus. It said the country has limited fiscal space to respond to the challenges posed by the health crisis. General government debt stood at 70 per cent of GDP in FY20, well above the ‘BBB’ median of 42 per cent.
India’s relatively robust external position supports its sovereign rating and has helped to offset its comparatively weaker fiscal metrics. “We now expect India’s ratio of public debt/GDP to rise to over 77 per cent of GDP in FY21 — up from a forecast of 71 per cent when we affirmed the rating in December — and to stay on an upward track in FY22,” said Fitch Director for Sovereigns Thomas Rookmaaker.
“This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” he said in a statement. Risks to the medium-term economic outlook will increase if India experiences another bout of stress in its financial system. The current slowdown will reverse at least some improvement of the past few years in banking-sector health.
Prolonged financial-sector weakness could weigh on credit growth, economic output, investment and productivity, said Fitch. “Further deterioration in the fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when it entered this crisis.
Our assessment of India’s rating in such a case will be guided by our judgement of its probable medium-term fiscal path in the post-crisis environment.” The government may tighten fiscal policy again once the pandemic is under control.
“But India’s record of meeting fiscal targets and implementing fiscal rules has been mixed in recent years, which will colour our assessment of any official commitment to tighten fiscal policy over the medium term,” said Fitch. (ANI)
