Fitch Ratings lowered India’s sovereign rating outlook to ‘negative’ from ‘stable’ on Thursday, citing the severe impact of the coronavirus, or Covid-19, pandemic on the country’s growth and public finances outlook. The rating agency affirmed the country’s rating at ‘BBB-‘.
“The coronavirus pandemic has significantly weakened India’s growth outlook for this year and exposed the challenges associated with a high public-debt burden,” Fitch said.
The rating agency forecast 5 percent contraction for the Indian economy for this fiscal year ending March 2021, due to the strict lockdown measures imposed since March 25. The economy is expected to rebound by 9.5 percent in the next fiscal year. Despite pressing humanitarian and health needs, the government has shown expenditure restraint so far, due to the already high public-debt burden going into the crisis, with additional relief spending representing only about 1 percent of GDP, Fitch estimated.
Further fiscal spending of up to 1 percentage point of GDP may still be announced in the next few months, which was indicated by a recent announcement of additional borrowing for the fiscal year 2021 of 2 percent of GDP, although we do not expect a steep rise in spending, the agency added.
Latest official data showed that gross domestic product grew 3.1 percent year-on-year in the three months to March compared to 5.7 percent in the same period last year. The latest growth rate is the lowest in at least eight years.
The Reserve Bank of India cut interest rates twice thus far this year and the RBI governor has warned that growth is likely to be in negative territory in the 2020-21, which would be the first contraction in four decades.
Fitch also drew attention to rising geopolitical risks to the outlook in the backdrop of the recent tensions on the borders with China and Pakistan. “A stronger focus by the ruling Bharatiya Janata Party on its Hindu-nationalist agenda since the government’s re-election in May 2019 risks becoming a distraction for economic reform implementation and could further raise social tensions,” Fitch warned.
The agency also cautioned that a structurally weaker real GDP growth outlook, for instance due to continued financial-sector weakness or reform implementation that is lacking, and a failure to reduce the fiscal deficit after the pandemic recedes and to put the general government debt/GDP ratio on downward path could attract a negative rating action or downgrade.
India is still battling a severe spread of the coronavirus, or Covid-19, especially in its commercial hub Mumbai. The country’s capital New Delhi and the southern state of Tamil Nadu are also among the worst hit locations.
The government began easing the lockdown restrictions from May 18 in areas where the number of cases is less.
Household consumption and investment have been severely hurt as economic activity came to a standstill.
Economists are looking forward to significantly worse figures for the second quarter as the country remained in total lockdown throughout April and during the first half of May.