Fitch warns India against further deterioration in fiscal outlook

India’s sovereign score may come beneath stress if its fiscal outlook deteriorates additional as the federal government tries to steer the nation via the coronavirus disaster, score company Fitch mentioned on Tuesday.

Fitch presently charges India at BBB-, with a secure outlook, however any downgrade would consign its sovereign debt to junk bond territory.

The score company famous that India is prone to publish dismal financial development this 12 months on account of the coronavirus pandemic, and the federal government has restricted room to supply fiscal stimulus.

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“The government 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 the medium term,” Fitch warned.

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Fitch didn’t present an estimate for fiscal deficit however Morgan Stanley in a be aware final week mentioned the central authorities deficit may rise to six.2% of GDP in 2020/21 versus the budgeted goal of three.5% primarily based on its development projection of 0.5% for FY21.

Fitch additionally lower the nation’s GDP development forecast for fiscal 12 months ending March 2021 to 0.8%, sharply down from its earlier forecast of 5.6% earlier than the coronavirus outbreak.

“We expect growth to rebound to 6.7% 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.”

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Risks to the medium-term financial outlook will enhance if India experiences one other bout of stress in its monetary system, the company mentioned.

The present slowdown will reverse at the very least among the enchancment of the previous few years in banking-sector well being whereas extended financial-sector weak point may weigh on credit score development, financial output, funding and productiveness, it added.

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To slow the coronavirus outbreak, the government has put the country under a lockdown that has already lasted for more than a month, and while it is set to end on May 3 an extension until at the least the middle of the May is possible.

The country has recorded over 29,400 coronavirus cases and 934 deaths, while global cases have risen to over 3 million.

Fitch had affirmed India’s current rating and outlook in December, before the onset of the coronavirus.

The rating agency believes the country has limited fiscal space to respond to the challenges posed by the health crisis and the government debt is likely to rise to over 77% of GDP in FY21 versus 70% of GDP in FY20 on the back of fall in growth, wider fiscal deficits and assuming a restrained fiscal response.

The median debt to GDP for ‘BBB’ rated countries stands at 42% of GDP but India’s relatively robust external position supports its sovereign rating currently and has helped offset its comparatively weaker fiscal metrics, according to Fitch.

McKinsey and Company in April had projected the economy could contract sharply by around 20% in the three months through June if the lockdown gets extended to mid-May with full year growth likely falling 2% to 3%.