Fitch lowers India’s outlook to negative

Fitch Ratings lowered India’s outlook to negative from stable for the first time in eight years, saying the coronavirus pandemic had significantly weakened the country’s growth outlook for the year and exposed the challenges associated with a high public-debt burden.

The international rating agency, however, retained India’s rating at ‘BBB-’, which is the lowest investment grade and a notch above junk, and said that there are considerable risks to growth.

Fitch expects 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 2021-22.

“The coronavirus pandemic has significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden. The rebound will mainly be driven by a lowbase effect,” it said, while revising the outlook on India’s long-term foreign currency issuer default rating (IDR) to negative from stable.

Fitch had last in 2012 cut India’s outlook to negative, from stable. In 2013, the agency had again upped the outlook to stable.

It projected general government debt to jump to 84.5 per cent of the gross domestic product in FY21 from an estimated 71 per cent of GDP in FY20.

Fitch said the 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.

“A stronger focus by the ruling Bharatiya Janata Party on its Hindu-nationalist agenda since the government’s re-election in May 2019 risks becoming a distraction for economic reform implementation and could further raise social tensions,” Fitch added.

The rating agency said the government has announced structural reforms as part of its response to the pandemic to strengthen GDP growth over the medium term, which, if successful, could improve India’s fiscal position.

The reforms to improve the efficiency of agricultural supply chains could help reduce food prices and swings in inflation, while intention to privatise state-owned enterprises (SOE) could prove to be transformative, it added.

Fitch, however, said its growth 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.

“It remains to be seen whether India can return to sustained growth rates of 6 to 7 per cent as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector,” Fitch said.

Fitch’s rating action comes after another rating agency Moody’s earlier this month downgraded India’s sovereign rating by a notch to lowest investment grade of ‘BAA2’ for the first time in 22 years.

No comments: