India’s Fiscal Past May Come Back To Haunt It During Covid-19 Fight, Warns Fitch Ratings
India entered the Covid-19 crisis with limited fiscal space. Now, the spread of the novel coronavirus and measures to contain it, have damaged India’s fiscal outlook further and could pressure its sovereign rating, said Fitch Ratings in a release on Tuesday.
The cautionary note comes at a time when the Indian government is debating a second round of fiscal stimulus to support the economy. The first set of announcements, entailing a spend of Rs 1.7 lakh crore, accounted for less than 1 percent of nominal GDP.
Further fiscal easing to support growth is likely to be announced, given the extended lockdown, said Thomas Rookmaaker, director for sovereign ratings at Fitch, adding that this could pressure India’s sovereign rating.
“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,” Rookmaaker said.
The Covid crisis has forced governments across the world to announce large fiscal support packages. The International Monetary Fund, too, has highlighted the need for such support. As such, most nations will see wider fiscal deficits and higher public debt.
Fitch said the impact of such fiscal expansion on sovereign ratings will depend on the medium term outlook. In India’s case, its track record in maintaining fiscal discipline may colour the rating agency’s view.
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.Thomas Rookmaaker, Director - Sovereign Ratings, Fitch Ratings
India’s sovereign rating stands at ‘BBB-’ with a stable outlook.
Fitch expects India’s real GDP growth to fall to 0.8 percent in FY21, compared to a forecast of 5.6 percent estimated in December. Growth could rebound to 6.7 percent in FY22. India’s ratio of public debt to GDP is estimated to rise to over 77 percent in FY21 from 71 percent estimated prior to the outbreak of coronavirus.
“General government debt stood at 70 percent of GDP in FY20, according to our estimate, well above the ‘BBB’ median of 42 percent. India’s relatively robust external position supports its sovereign rating, and has helped to offset its comparatively weaker fiscal metrics,” Fitch Ratings said.
India’s economic outlook may be further clouded by the health of its financial sector.
In March, Fitch downgraded their operating environment score for the Indian banking sector as the pandemic had aggravated the challenges facing banks and non-banking financial institutions. Systemic risks were highlighted by the government’s takeover in March of Yes Bank, a medium-sised private lender. Fitch had also downgraded the ratings of three Indian non bank financial institutions in March to reflect the deteriorating macroeconomic environment.
“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 of the improvement of the past few years in banking-sector health,” Fitch said. “Prolonged financial-sector weakness could weigh on credit growth, economic output, investment and productivity,” it added.