Fitch Affirms India At ‘BBB-’, Outlook Negative
The headquarters of Fitch Ratings Ltd. stands in the Canary Wharf business and shopping district in London, U.K., on Friday, July 12, 2013. Recent data suggest Britain’s economic recovery is gaining momentum after a return to growth in the first quarter. Photographer: Simon Dawson/Bloomberg

Fitch Affirms India At ‘BBB-’, Outlook Negative

Fitch Ratings has affirmed India’s sovereign rating at ‘BBB-’ with a negative outlook.

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, according to a press release by Fitch ratings published on Thursday. The negative outlook, it said, 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, it said.

Growth Recovery Unlikely To Be Derailed

India’s GDP is estimated to grow 12.8% in FY22, moderating to 5.8% in FY23, from an estimated contraction of 7.5% in FY21, according to the ratings agency. However, a recent surge in coronavirus cases poses increasing downside risks to the FY22 outlook, it cautioned.

“This second wave of virus cases may delay the recovery, but it is unlikely in Fitch's view to derail it,” the release said, adding that the strong rebound in the second half of FY21 and ongoing policy support underpin our expectations for a recovery. "We expect pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in 2Q20, and the vaccine rollout has been stepped up."

Deterioration In Fiscal Outlook

Fiscal metrics have deteriorated sharply because of efforts to support health outcomes and the economic recovery, Fitch said. It estimates a general government deficit of 14% of GDP in FY21 (excluding divestment) compared with 7.3% in FY20, consistent with a deficit of 9.5% for the central government. Part of the increase in the FY21 deficit reflects increased transparency by bringing off-budget spending on budget, the ratings agency said.

For the next financial year, general government deficit is estimated to narrow to 10.8% of GDP while the central government deficit is estimated at 7.1%. "This is on the basis of our expectations of growth recovery and strong revenue performance in the second half of FY21," Fitch said.

For general government debt, the ratings agency estimates it to rise to 90.6% of GDP in FY21 compared to 73.9% in FY20—well above the current ‘BBB’ median of 54.4% in 2020. The debt ratio is estimated to decline to 89% of the GDP by FY25 under the baseline forecasts, which assume 10.5% nominal growth and gradual consolidation of the general government primary deficit to 2.8% of GDP by FY25.

Risks to this forecast relate to India's weak record of fiscal consolidation, said Fitch. For example, government debt fell between the global financial crisis and FY15, but then rose gradually despite double-digit nominal GDP growth, it said. Improved transparency by the government should imply significantly less off-budget financing, but contingent liabilities, such as bank recapitalisations, may also materialise, it added.

The medium-term debt trajectory is core to our rating assessment, as higher debt levels constrain the government’s ability to respond to future shocks and could lead to a crowding out of financing for the private sector, in our view. India’s current ability to finance its deficits domestically is a strength relative to most ‘BBB’ peers.
Fitch Ratings 

The government remains reform-minded, evidenced by the passing of agricultural and labour market reforms in November, Fitch stated. These reforms could lift growth if implementation risks are addressed, particularly for the agricultural reforms which have met stiff resistance by farmers, it said. The production-linked incentives scheme to attract FDI and planned increase in public capex could boost private sector investment, it added.

Weaknesses in India's financial sector pose a risk to the medium-term outlook.

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