Fitch revises India's outlook to negative, affirms IDR at BBB-minus
Jun 18, 2020
Hong Kong, June 18 : Fitch Ratings on Thursday revised the outlook on India's long-term foreign currency issuer default rating (IDR) to negative from stable and affirmed the rating at BBB-minus.
"The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden," it said expecting 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."
Fitch said it remains to be seen whether India can return to sustained growth rates of 6 to 7 per cent as previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector.
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 Fitch estimates.
Most elements of an announced package totalling 10 per cent of 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 Fitch does not expect a steep rise in spending.
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 FY21 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 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 geopolitical risk related to longstanding border issues with India's neighbours was highlighted again by recently intensified tensions with China. Relations with Pakistan are, moreover, negatively affected by the repeal of the special status for Kashmir and recent changes to the status of illegal immigrants based on their religion.
