Global ratings agency Fitch revised the outlook on India’s sovereign rating to negative from stable but retained the rating at BBB (minus), saying 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 (FY21) due to the strict lockdown measures, before rebounding by 9.5% in FY22, mainly driven by a low-base effect.
Another ratings agency Moody’s had downgraded the country’s sovereign rating to a level just above the junk bond status and retained the outlook as negative, while S&P has affirmed the rating at BBB (minus) and has a stable outlook.
“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.
It said the humanitarian and health needs have been pressing, but the government has shown expenditure restraint so far, due to the already high public-debt burden going into the crisis, with additional relief spending representing only about 1% of GDP by our estimates. Most elements of the announced package, totalling 10% of GDP, are non-fiscal in nature. Further fiscal spending of up to 1 percentage point of GDP may still be announced in the next few months, which was indicated by a recent announcement of additional borrowing of 2% of GDP for FY21, although we do not expect a steep rise in spending, the agency said.
Fitch 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. It expects general government debt to jump to 84.5% of GDP in FY21from an estimated 71% 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,” the agency said.
It said that India’s record of fiscal consolidation has been mixed since the 2008 global financial crisis, with the general government debt remaining broadly stable at close to 70% of GDP for over a decade. Weak implementation of fiscal rules stipulated in the Fiscal Responsibility and Budget Management Act contributes to our view that a speedy fiscal improvement after the pandemic recedes is unlikely, the agency said.
