India’s Investment-Grade Rating Remains Under Strain: Fitch

Downside pressures on India’s creditworthiness remain prominent and the ongoing health crisis will depress economic activity in the near term, Fitch Ratings has said. On April 22, the agency had affirmed India’s long-term foreign-currency issuer default rating (IDR) at BBB-minus with negative outlook. Senior Director Duncan Innes-Ker said the rating remains supported by the country’s robust external position and strong medium-term economic growth outlook.

However, the Covid-19 pandemic has put further stress on public finances which were already a source of rating weakness. “We estimate that general government debt rose to 90.6 per cent of GDP in the fiscal year ending March 2021 (FY21) from 73.9 per cent in FY20, well above the BBB median of 54.4 per cent in 2020,” said Innes-Ker.

Under baseline forecasts — which assume average annual nominal GDP growth of 10.5 per cent and gradual consolidation of general government primary deficit to 2.8 per cent of GDP by FY25 — the debt ratio declines slightly over medium term. Yet, it will remain particularly high for an emerging market at 89 per cent of GDP in FY25.

“The medium-term debt trajectory is core to our rating assessment as we believe higher debt levels constrain the government’s ability to respond to future shocks and can lead to a crowding out of financing for the private sector,” said Innes-Ker.

The government’s reforms like the agricultural and labour market legislation passed in November can help to lift India’s sustainable economic growth rate, which will aid fiscal consolidation. However, the changes remain subject to implementation risks. Meanwhile, the surge in Covid-19 cases since March has also highlighted risks to economic outlook.

“The ongoing health crisis will depress activity in the near term. But if it adds to asset quality stresses in the financial sector, it can also have longer-term dampening effects on growth prospects, as well as adding to contingent sovereign liabilities.” Fitch added that the risk of further waves of Covid-19 virus will remain so long as vaccination rates remain low.