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.