Fitch affirms BBB- rating, says COVID surge may delay economic recovery

Fitch Ratings on Thursday affirmed ‘BBB-‘ sovereign rating for India, saying the recent surge in coronavirus cases poses increasing downside risks to the FY22 GDP growth outlook. The second wave of virus cases may delay the recovery, but is unlikely to derail it, Fitch said, while maintaining a negative outlook for the rating reflecting “lingering uncertainty around the debt trajectory”.

For India, it has forecast a GDP growth of 12.8% in FY22, moderating to 5.8% in FY23.

“However, a recent surge in coronavirus cases poses increasing downside risks to the FY22 outlook. This second wave of virus cases may delay the recovery, but it is unlikely in Fitch’s view to derail it,” it said.

With 3.14 lakh Covid cases in the last 24 hours, India recorded the world’s highest daily spike.

The negative outlook, Fitch said, reflects lingering uncertainty around the debt trajectory following the sharp deterioration in India’s public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom.

Fitch said it expected pandemic-related restrictions to remain localised and less stringent than the national lockdown imposed in 2020, and the vaccine rollout has been stepped up.

As per the ratings agency, fiscal metrics have deteriorated sharply because of efforts to support health outcomes and the economic recovery. It estimates a general government deficit of 14% of GDP in FY21 (excluding divestment) compared with 7.3% in FY20, consistent with a deficit of 9.5% for the central government.

It expects the general government deficit to narrow to 10.8% of GDP (7.1% central government), on the basis of its expectations of growth recovery and strong revenue performance in the second half of FY21.

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“The medium-term debt trajectory is core to our rating assessment, as higher debt levels constrain the government’s ability to respond to future shocks and could lead to a crowding out of financing for the private sector, in our view,” it said, adding that India’s current ability to finance its deficits domestically is a strength relative to most ‘BBB’ peers and expects the country’s potential growth to remain robust relative to ‘BBB’ peers at around 6.5%

The government remains reform-minded, evidenced by the passing of agricultural and labour market reforms in November, according to Fitch.

“These reforms could lift growth if implementation risks are addressed, particularly for the agricultural reforms which have met stiff resistance by farmers”, it said.

While the production-linked incentives scheme to attract FDI and planned increase in public capex could boost private sector investment, weaknesses in India’s financial sector pose a risk to the medium-term outlook.



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