Fitch warns India against further deterioration in fiscal outlook

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 India‘s sovereign rating could come under pressure if its fiscal outlook deteriorates further as the government tries to steer the country through the coronavirus crisis, rating agency Fitch said on Tuesday.

Fitch currently rates India at BBB-, with a stable outlook, but any downgrade would consign its sovereign debt to junk bond territory.

The rating agency noted that India is likely to post dismal economic growth this year as a result of the coronavirus pandemic, and the government has limited room to provide fiscal stimulus.

“The government may tighten fiscal policy again once the pandemic is under control, but India‘s record of meeting fiscal targets and implementing fiscal rules has been mixed in recent years, which will colour our assessment of any official commitment to tighten fiscal policy over the medium term,” Fitch warned.

Fitch did not provide an estimate for fiscal deficit but Morgan Stanley in a note last week said the central government deficit could rise to 6.2% of GDP in 2020/21 versus the budgeted target of 3.5% based on its growth projection of 0.5% for FY21.

Fitch also cut the country’s GDP growth forecast for fiscal year ending March 2021 to 0.8%, sharply down from its previous forecast of 5.6% before the coronavirus outbreak.

“We expect growth to rebound to 6.7% in FY22, but there is a risk that the crisis could amplify fiscal and financial sector strains and hurt the country’s growth prospects over the medium term.”

Risks to the medium-term economic outlook will increase if India experiences another bout of stress in its financial system, the agency said.

The current slowdown will reverse at least some of the improvement of the past few years in banking-sector health while prolonged financial-sector weakness could weigh on credit growth, economic output, investment and productivity, it added.

To slow the coronavirus outbreak, the government has put the country under a lockdown that has already lasted for more than a month, and while it is set to end on May 3 an extension until at the least the middle of the May is possible.

The country has recorded over 29,400 coronavirus cases and 934 deaths, while global cases have risen to over 3 million.

Fitch had affirmed India‘s current rating and outlook in December, before the onset of the coronavirus.

The rating agency believes the country has limited fiscal space to respond to the challenges posed by the health crisis and the government debt is likely to rise to over 77% of GDP in FY21 versus 70% of GDP in FY20 on the back of fall in growth, wider fiscal deficits and assuming a restrained fiscal response.

The median debt to GDP for ‘BBB’ rated countries stands at 42% of GDP but India‘s relatively robust external position supports its sovereign rating currently and has helped offset its comparatively weaker fiscal metrics, according to Fitch.

McKinsey and Company in April had projected the economy could contract sharply by around 20% in the three months through June if the lockdown gets extended to mid-May with full year growth likely falling 2% to 3%.