Fitch revises India's outlook to negative (Lead)
by IANS | Updated Jun 18, 2020
The revision of the outlook to negative on India's Long-Term IDRs reflects concerns over economic contraction that the country is expected to encounter due to Covid-19 pandemic, it said.
"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 Ratings said.
Fitch expects economic activity to contract by 5 per cent in the fiscal year ending March 2021 (FY21) from the strict lockdown measures imposed since March 25, before rebounding by 9.5 per cent in FY22.
"The rebound will mainly be driven by a low-base effect. 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," the ratings agency said.
"It remains to be seen whether India can return to sustained growth rates of 6 per cent to 7 per cent as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector."
According to Fitch, the humanitarian and health needs of the country 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".
As per Fitch's report, most elements of an announced package totalling 10 per cent of the GDP are non-fiscal in nature.
"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," it said.
Besides, 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.
"Fitch expects general government debt to jump to 84.5 per cent of GDP in FY 21 from an estimated 71 per cent of GDP in FY20. This is significantly higher than the median of 42.2 per cent of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6 per cent for 2020," the report said.
"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."
Furthermore, 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 per cent of GDP for over a decade.
"Double-digit nominal GDP growth has not led to a decline in the government debt ratio in recent years, an important reason being the crystallisation of contingent liabilities and significant off-budget financing," the report said.
"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."
Additionally, Fitch said that India'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 (NBFC).
"The financial sector was already facing weak business and consumer confidence before the crisis and authorities had to deal with some high-profile cases over lapses in governance," the report said.
"Nonetheless, the banking sector's non-performing loan (NPL) ratio likely improved to 9 per cent in FY20 from 11.6 per cent two year earlier, according to our estimate, due to government capital injections."
On June 1, global credit ratings agency Moody's Investors Services downgraded India's sovereign ratings as it sees challenges piled up on the country's policymaking institutions to mitigate the risks of a sustained period of relatively low growth.
It also kept the outlook as negative.
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