Fitch confirms BBB- rating, says COVID surge could delay economic recovery

Fitch Ratings said on Thursday that the resurgence of COVID-19 infections could delay India’s economic recovery, but will not derail it, as it kept the sovereign rating unchanged at “BBB-” with a negative outlook.

It forecasted a recovery of 12.8% of GDP during the fiscal year ending in March 2022 (FY22), slowing to 5.8% during FY23, against an estimated contraction of 7.5% in 2020 -2021.

In June last year, Fitch revised the outlook for India from “negative” to “stable” on the grounds that the coronavirus pandemic had significantly weakened the country’s growth prospects and exposed the challenges associated with a burden of high public debt.

India has benefited from a “BBB-” rating since the upgrade in August 2006, but the outlook has fluctuated between stable and negative.

By affirming the “BBB-” rating, Fitch maintained a negative outlook for the rating on Thursday, reflecting “the lingering uncertainty around the debt path.”

“India’s rating balances a still strong medium-term growth outlook and external resilience thanks to strong foreign exchange reserves, high government debt, weak financial sector and some lagging structural factors.

“The negative outlook reflects the lingering uncertainty around the debt trajectory following the sharp deterioration in India’s fiscal parameters due to the pandemic shock resulting from a previous position of limited fiscal space,” he said. he said in a statement.

Larger budget deficits and the government only anticipates a gradual narrowing of the deficit further weigh on India’s ability to return to high levels of GDP growth in the medium term to stabilize and reduce the debt ratio.

Fitch said the recent spike in coronavirus cases poses increasing downside risks to the outlook for FY22. “This second wave of virus cases may delay recovery, but it is unlikely in Fitch’s opinion to derail it. ” In particular, the strong rebound in the second half of FY21 and continued political support underpin our recovery expectations. “We expect the restrictions related to the pandemic to remain localized and less stringent than the national lockdown imposed in 2Q20, and the vaccine rollout has been stepped up,” he said.

India recorded 3,12,731 new infections in 24 hours – the highest daily number of cases in a single country since the virus first appeared in China more than a year ago. In the past two months, the epidemic in India has exploded, with reports of super-spreader rallies, oxygen shortages and drug shortages.

The death toll also climbed to a record 2,104.

“Fiscal measures have deteriorated sharply against the backdrop of the macroeconomic shock and efforts to support health outcomes and economic recovery. with a 9.5% deficit for the central government, ”Fitch said.

Part of the increase in the fiscal year 21 deficit (around 1.5 percent of GDP) reflects increased transparency by reducing off-budget spending on the budget. The government repays loans to the Food Corporation of India from the National Small Savings Fund, and then keeps these subsidy expenses in the budget.

“We expect the general government deficit to narrow to 10.8% of GDP (7.1% of central government), based on our expectations of resuming growth and good revenue performance in 2HFY21 “, did he declare.

The central government budget for fiscal 22 provided for gradual medium-term consolidation, targeting a deficit of 4.5 percent of GDP by fiscal 26. This compares to a previous medium-term target of 3 percent of GDP. percent of GDP under the Fiscal Responsibility and Fiscal Management Act.

“The medium-term debt trajectory is central to our rating assessment, as higher debt levels limit the government’s ability to respond to future shocks and could, in our view, lead to crowding out funding from the government. private sector. India’s current ability to finance its deficits nationally is a strength compared to most of its “BBB” peers, he said.

Fitch expects India’s growth potential to remain robust relative to its “BBB” peers, at around 6.5%.

“The government remains concerned with reforms, as evidenced by the adoption of agricultural and labor market reforms in November. These reforms could revive growth if implementation risks are addressed, especially for agricultural reforms which have met stiff resistance from farmers.

“The production-related incentive program to attract FDI and the planned increase in public investment could stimulate private sector investment,” he noted.

However, weaknesses in India’s financial sector threaten the medium-term outlook. “The degree of deterioration in asset quality due to the pandemic shock is unclear, amid regulatory forbearance measures and renewed second wave pressures.” Fitch expected inflation to decline to an average of 4.4% in FY22, after exceeding the RBI’s 2-6% target range for much of FY21. .

“Price pressures have moderated, although headline and core inflation remain near the upper end of the band. We expect the RBI to keep the policy rate stable over the next year. the coming year, after a drop of 115 basis points since March 2020 “, he added.

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Posted on: Friday April 23, 2021 09:37 IST

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