Despite claims of growth by India, Fitch ranks India as BBB- with a negative outlook

Fitch forecast growth of around 7% between FY24 and FY26, supported by the govt's reform agenda

November 17, 2021

Fitch Ratings keeps India’s ranking unchanged

Fitch Ratings on Tuesday affirmed India’s sovereign rating at ‘BBB-‘ with a negative outlook.

The Fitch Ratings, a leading provider of credit ratings for the global capital market said that India’s rapid economic recovery from Covid pandemic, easing financing sector pressures are narrowing risks to medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural issues.

However, “The negative outlook on the rating reflects lingering uncertainty around the medium-term debt trajectory, particularly given India’s limited fiscal headroom relative to rating peers,” it said.

It has forecasted robust GDP growth of 8.7% in FY22 and 10% in FY23 around 7% between FY24 and FY26, for India supported by the resilience of India’s economy, which has facilitated a swift cyclical recovery from the Covid wave in 2Q21.

India has had a ‘BBB-‘ rating since the upgrade in August 2006 but the outlook has oscillated between stable and negative. In affirming the ‘BBB-‘ rating, Fitch on Tuesday maintained a negative outlook for the rating reflecting “lingering uncertainty around the medium-term debt trajectory, particularly given India’s limited fiscal headroom relative to rating peers.” ‘BBB-‘ is the lowest investment-grade rating.

It said, “Fiscal metrics are also showing signs of improvement and we forecast the general government deficit to narrow to 10.6% of GDP in FY22, from 13.6% in FY21. This is consistent with an FY22 central government deficit of 6.9% of GDP, excluding divestment receipts. Per the government’s deficit definition, including divestment, this would be 6.6% of GDP, which is slightly below the budget target. Strong revenue growth, particularly from goods and services tax collections, is facilitating the government to stay within its budget parameters, despite modest additional spending pressure from the second pandemic wave.

We forecast interest payments/ revenue to reach 28.2% in FY22 (2021 ‘BBB’ median: 6.9%), which will limit the sovereign’s fiscal flexibility.”

“Mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector. The potential remains for a resurgence in coronavirus cases, though we anticipate the economic impact of further outbreaks would be less pronounced than previous surges, particularly given the sustained improvement in the COVID-19 vaccination rate, which has now surpassed 1 billion doses administered,” the rating agency said.

The report said that the government’s production-linked incentive scheme to boost foreign direct investment, labour reform, and the creation of a ‘bad bank‘, along with an infrastructure investment drive and the ‘National Monetization pipeline‘ should support the growth outlook if fully implemented.

“The level of asset quality deterioration from the pandemic, while masked by forbearance relief, also appears less severe than what we had anticipated,” it said.

In addition, it said that the recently incorporated ‘National Asset Reconstruction Company‘ (bad bank) could help banks address the expected build-up of impaired loans while sustaining adequate credit growth, though more details are needed to fully assess its potential.

“Still, we expect credit growth to remain constrained, averaging at 6.7 percent YoY over the next several years, unless adequate recapitalization can mitigate the risk aversion currently seen among the banks,” the rating agency said.

[With Inputs from IANS]

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