India's rating could come under pressure if fiscal outlook deteriorates: Fitch

NEW DELHI: India’s sovereign rating could come under pressure if the fiscal outlook deteriorates further, either due to lower growth or fiscal easing, said Fitch Ratings.

“The assessment of India’s rating in such a case would be guided by our judgement of its probable medium-term fiscal path in the post-crisis environment,” the agency said, adding that further deterioration in fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when it entered the crisis.

Fitch said general government debt stood at 70 per cent of GDP in FY20 well above the ‘BBB’ median of 42 per cent. In December, it had reaffirmed India’s ‘BBB-’ rating with a stable outlook.

According to the ratings agency, the Centre 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 medium term.

Fitch has revised down India’s FY21 economic growth forecast to 0.8 per cent down from its earlier forecast of 5.6 per cent, reflecting the impact of the coronavirus pandemic and government efforts to contain it. “We expect growth to rebound to 6.7 per cent 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,” Fitch explained.

India’s relatively robust external position supports its sovereign rating, and has helped to offset its comparatively weaker fiscal metrics. “We now expect India’s ratio of public debt/GDP to rise to over 77 per cent of GDP in FY21 — up from a forecast of 71 per cent when we affirmed the rating in December — and to stay on an upward track in FY22,” Fitch said.

This estimate is based on expectations of slower economic growth in 2020-21 and wider fiscal deficits, assuming that the Centre’s fiscal response remains restrained.