Fitch affirms India’s rating at ‘BBB-‘; outlook negative due to Covid surge

Rating agency has affirmed India’s long-term foreign-currency issuer default rating (IDR) at ‘BBB-‘ with a negative outlook.

India’s rating balanced a still strong medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural factors, Fitch said in a statement.

The negative outlook reflected lingering uncertainty around the debt trajectory following a sharp deterioration in India’s public metrics due to the pandemic shock from a previous position of limited fiscal headroom, it added.

Wider fiscal deficits, and government plans for only a gradual narrowing of the deficit, put greater onus on India’s ability to return to high levels of economic growth in the medium term to stabilise and bring down the debt ratio.

The gross domectic Product (GDP) of India is expected to grow at 12.8 per cent in the financial year ending March 2022 (FY22). It would moderate to 5.8 per cent in FY23.

The Indian economy is estimated to have contracted by 7.5 per cent in FY21. However, a recent surge in cases poses increasing downside risks to the FY22 outlook.

This second wave of virus cases might delay the recovery, but it was unlikely to derail it. In particular, the strong rebound in the second half of FY21 and ongoing policy support underpinned its expectations for a recovery, the agency said.

“We expect pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in 2QFY21, and the vaccine rollout has been stepped up”, it added.

“Fiscal metrics have deteriorated sharply in the context of the macroeconomic shock and efforts to support health outcomes and the economic recovery. We estimate a general government deficit of 14 per cent of GDP in FY21 (excluding divestment) from 7.3 per cent in FY20.”

Notably, part of the increase in the FY21 deficit (around 1.5 per cent of GDP) reflects increased transparency by bringing off-budget spending on Budget, according to the agency.

The government was repaying loans to the Food Corporation of India from the National Small Savings Fund and then to keep such subsidy spending on-budget, Fitch added.

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