Fitch Lowers Outlook On India To 'Negative'

Fitch said its forecasts are subject to considerable risks due to rising COVID-19 cases

Credit ratings agency Fitch said on Thursday it had revised its outlook on India to “negative” from “stable”, and affirmed the rating at “BBB-” –  the lowest investment grade. 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 said. The change in its outlook on India’s long-term foreign-currency issuer default rating comes days after another rating agency, S&P, also retained the country’s sovereign rating at the “BBB-” with a stable outlook.


Fitch said it expects economic activity in the country to contract 5 per cent in the current fiscal year from the strict lockdown measures imposed since March 25 2020. However, the ratings agency reiterated that gross domestic product (GDP) in the country will grow 9.5 per cent in the next fiscal year (2021-22), with the rebound mainly driven by a low-base effect.


The agency said its 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”.


“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 per cent of GDP by our estimates. Most elements of an announced package totalling 10 per cent of GDP are non-fiscal in nature,” Fitch said.


Last month, the government provided details of fiscal and monetary support worth Rs 21 lakh crore – equivalent to 10 per cent of GDP – to help the country battle the fallout from the coronavirus pandemic. However, economists say that much of this has already been budgeted for by the government and very little includes new spending.


“Some 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 for FY21 of 2 per cent of GDP, although we do not expect a steep rise in spending,” Fitch said.


The credit ratings major said it expects the government debt to jump to 84.5 per cent of GDP in the current fiscal year, from an estimated 71.0 per cent of GDP in 2019-20. This is significantly higher than the median of 42.2 per cent of GDP for the “BBB” category, which represents good credit quality, in 2019. Fitch’s “BBB” ratings indicate that expectations of default risk are currently low.


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, Fitch said.


The country’s medium-term GDP growth outlook may be negatively affected by renewed asset-quality challenges in banks and liquidity issues in non-banking financial companies (NBFCs), according to Fitch.

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