Fitch Ratings on Thursday re-affirmed India’s country rating at BBB- with a negative outlook, saying the second wave of coronavirus cases may delay economic recovery but is unlikely to fail.
In June last year, Fitch revised the outlook for India from “stable” to “negative”, stating that the coronavirus pandemic had severely weakened the country’s growth prospects and exposed the challenges associated with high public debt.
India’s medium-term rating offsets still strong growth prospects and external resilience from solid currency reserve buffers against high government debt, a weak financial sector and some lagging structural factors. “The negative outlook reflects ongoing debt uncertainty after India’s public finance metrics deteriorated significantly due to the pandemic shock from an earlier position with limited fiscal space,” it said.
Larger budget deficits and government plans to reduce the deficit only gradually are weighing on India’s ability to return to high GDP growth in the medium term in order to stabilize and reduce the debt ratio.
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The rating agency forecast GDP growth of 12.8 percent for the financial year ending March 2022 (FY 22), which weakened to 5.8 percent in FY 23, after an estimated decline of 7.5 percent in FY 21. Der however, the recent surge in coronavirus cases carries an increasing downside risk to the outlook for fiscal year 22.
“This second wave of virus cases may delay recovery, but Fitch believes it is unlikely to derail. In particular, the strong rebound in the second half of FY21 and continued political support support our expectations for recovery,” he said and added that the pandemic-related restrictions are likely to remain localized and less stringent than the national lockdown imposed in Q220. It was also highlighted that the introduction of the vaccine was stepping up.
India reported 3,14,835 new COVID-19 cases and 2,104 deaths from the infection in the previous 24 hours on Thursday morning. The country gave 13.58 doses of Crore vaccine Thursday night.
Fitch said fiscal metrics related to the macroeconomic shock and efforts to support health outcomes and economic recovery have deteriorated sharply, and estimates the general government deficit in FY21 (excluding divestments) to rise from 7.3 percent in 21 FY 20 is estimated at 14 percent of GDP, which corresponds to a central government deficit of 9.5 percent.
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“In particular, part of the increase in the FY21 deficit (around 1.5 percent of GDP) reflects increased transparency with off-budget spending on the budget. The government pays Food Corporation of India from the National Small Savings Fund and then loans back to keep such subsidy spending in budget, “it said.
“We expect the general government deficit to narrow to 10.8 percent of GDP (7.1 percent of central government) based on our expectations of growth recovery and strong sales in the second half of FY 21,” he added .
Fitch said India’s current ability to fund its deficits domestically is a strength compared to most of its “BBB” peers, given that foreign currency national debt is only 6 percent of total debt (“BBB” median 33%) and only 2 percent Percent of government securities accounted for held by non-residents.
Fitch expects inflation to fall to an average of 4.4 percent in FY22 after being above the Reserve Bank of India’s target range of 2 to 6 percent for much of FY21. “Price pressures have eased, although both headline and core inflation remain near the upper end of the band. We expect the RBI to keep the key rate stable for the coming year after the cuts have fallen 115 basis points since March 2020 . ”
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