Fitch cuts GDP growth to 8.7%, cites COVID impact

Rating outlook stays ‘negative’ on debt

Fitch Ratings slashed its FY22 growth forecast for India from 10% to 8.7%, citing the severe second COVID-19 wave, which it said would ‘delay rather than derail’ economic recovery. Accordingly, it raised the growth forecast for FY23 to 10% from 8.5% estimated earlier.

The ratings agency has also retained the ‘negative’ outlook on India’s sovereign BBB- rating, citing greater uncertainty over the country’s debt levels due to a sharp deterioration in public finances triggered by the pandemic shock.

“India’s rating balances a still-strong medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural factors,” Fitch said in its sovereign credit overview for the Asia-Pacific. The agency said higher public debt trajectories were the reason it had retained the ‘negative’ outlook for India as well as Japan and Australia.

“Wider fiscal deficits and government plans for only a gradual consolidation put greater onus on India’s ability to return to high GDP growth over the medium term to lower the debt ratio,” it noted, projecting the central government deficit to touch 7.2% of GDP this year, excluding disinvestment proceeds. The government has estimated ₹1.75 lakh crore as receipts from public sector firms’ stake sales.

On the fiscal package announced by India in June, Fitch said most of it consists of loan guarantees, with only 0.6% of GDP in higher on-budget spending, which should be largely offset by a buoyant revenue performance.

While it expects inflation to moderate and allow the central bank to keep rates on hold until 2022-2023, Fitch Ratings said high frequency indicators point to a strong rebound in the second quarter of this year, with business activity returning to pre-pandemic levels.

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