On the fiscal position, Fitch expected the government’s combined fiscal deficit to hit 11% in FY21 while it saw India’s debt-to-GDP ratio rising to 84.5% compared to an earlier projection of 71%.Although the geo-political tensions arising out of the India-China border issue may not impact India’s credit profile immediately, it could distract the government from implementing the announced policy reforms and impact medium term outlook, according to Fitch Ratings.
“The most recent situation at the border with China doesn’t impact the credit profile immediately. But the question is to what extent will the government be distracted by these kinds of developments in terms of delivering reforms,” said Thomas Rookmaaker, director of sovereign ratings at Fitch, during a webinar on Monday.
Just last week, Fitch changed its outlook on India’s sovereign credit rating to negative from stable while reaffirming its BBB- grade, the last rung of Fitch’s investment grade rating.
The global rating agency also highlighted potential financial sector weakness as a risk to its medium term growth outlook. This included an expected rise in non-performing loans post the moratorium and a liquidity crunch for non-banking financial companies, Rookmaaker said.
“The last time we looked at it we thought India might grow at upwards of 6.7% in the medium term but we’re going to have to revisit that to see if we think that’s still achievable after the crisis, especially with all the weaknesses in the financial sector, said Stephen Schwartz, head of Asia-Pacific sovereign ratings at Fitch.
“That will be one of the factors we will look at to decide whether or not to act on the negative outlook,” Schwartz added.
The agency forecast a 5% contraction in India’s FY21 growth along with a 9.5% recovery in the coming fiscal, which was largely attributed to a low base effect.
The forecast accounts for further stimulus measures by the government in the coming months. “The Covid-19 outbreak clearly hasn’t gone in India and it’s very likely that the government will have to spend a bit more,” Rookmaaker said.
Accordingly, Fitch factored in a larger than 1% of gross domestic product (GDP) fiscal impact of such measures. “There was also an announcement of bond issuance that was 2% of GDP and that could give an indication that another 1% of GDP worth of stimulus measures could still come in the months ahead,” he added.
In terms of the impact these measures and deteriorating fiscal metrics would have on the credit rating, Schwartz said it would depend on the debt to GDP ratio and the government’s ability to unwind stimulus measures.
“We’re also going to be looking at the track records of countries to unwind stimulus measures. So we look back, for example, to the global financial crisis, which of the countries had a good track record of unwinding its fiscal stimulus. That might give us some comfort that they can get the fiscal trajectory back down,” he said.
On the fiscal position, Fitch expected the government’s combined fiscal deficit to hit 11% in FY21 while it saw India’s debt-to-GDP ratio rising to 84.5% compared to an earlier projection of 71%.
Source: indiatimes.com