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Fitch: High debt-to-GDP ratio could strain India’s sovereign rating: Fitch


MUMBAI: India’s sovereign rating could be under strain as the already high debt to GDP ratio could jump further in 2020, widening fiscal deficit and increasing negative rating pressure on the country’s credit rating agency Fitch said.

The New York based rating agency has a BBB- rating on India with a stable outlook, which is the lowest among countries rated in the investment grade. It had last affirmed the country’s rating in December 2019 but now says the situation has changed due to the economic impact of the lockdown caused by the Covid 19 pandemic.

“The pandemic has drastically weakened India’s growth outlook and laid bare the challenges caused by a high public-debt burden…General government debt already stood at 70% of GDP in FY20, according to our estimate, well above the ‘BBB’ median of 42%. We now expect India’s ratio of public debt/GDP to rise to 84% of GDP in FY21 – up from a forecast of 71% when we affirmed the rating in December. This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” Fitch warned in a note.

Fitch’s warning comes just a week after another rating agency Moody’s cut India’s rating from ‘Baa2’ to ‘Baa3’ — a notch above junk citing structural weaknesses, weak policy effectiveness, and slow reforms momentum.

Moody’s Baa2 rating was the highest among the three top rating agencies including Standard & Poors and Fitch. The cut has brought ratings of all three agencies on par.

Moody’s has predicted a prolonged period of low growth for India. “While the action was taken in the context of Covid-19, it was not driven by its impact. Rather, the pandemic amplifies vulnerabilities in India’s credit profile that were building prior to the shock, and which motivated the assignment of a negative outlook

last year,” Moody’s said.

Fitch however is more optimistic on India’s return to a higher growth trajectory. Though it warned that the failure of governments to present credible medium-term strategies for stabilising or reversing the recent rise in debt-to-GDP levels after the crisis subsides, could strain ratings further, Fitch said.

“After the global crisis, India’s GDP growth is likely to return to higher levels than ‘BBB’ category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic. The credit profile is strengthened by relative external resilience stemming from solid foreign-reserve buffers, but weakened by some lagging structural factors, including governance indicators and GDP per capita,” Fitch said.

It has predicted India’s GDP growth to bounce back to 9.5% in 2021 after contracting 5% in 2020.

India along with Australia, Japan and Malaysia are among the countries in Asia Pacific where the government debt-to-GDP ratios were already above the respective peer medians.

Among the negative sensitivities of India’s rating was a possible increase in fiscal deficit.

“A material increase in the fiscal deficit, causing the gross general government debt/GDP ratio to be placed on a sustained upward trajectory. Loose macroeconomic policy settings that cause a return of persistently high inflation and widening current-account deficits, which would increase the risk of external funding stress,” Fitch said.

The rating agency noted that the government has announced stimulus measures amounting to 10% of GDP, of which the fiscal component of about 1% of GDP is significantly less than many of India’s peers highlighting the limited fiscal space available to the government.

However, greater confidence in a sustained reduction in general government debt over the medium-term and higher sustained investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation, are positive with respect to the country’s outlook.

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