Fitch affirms 'BBB-' rating for India, forecasts 8.7% GDP growth in FY22

Fitch Ratings on Tuesday affirmed India's long-term foreign-currency issuer default rating at 'BBB-', with a 'negative' outlook, and said the economy would grow 8.7 per cent in financial year 2021-22.
 
It said the 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 issues.
 
"The country's rapid economic recovery from the Covid-19 pandemic and easing financial sector pressures are narrowing risks to the medium-term growth outlook. However, the negative outlook on the rating reflects lingering uncertainty around the medium-term debt trajectory, particularly given India's limited fiscal headroom relative to rating peers," the ratings agency said in a release.
 
Last month Moody's Investors Service had changed the outlook on India's ratings to 'stable' from 'negative' and affirmed the foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating at 'Baa3'.
 
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Fitch forecasted India's GDP to grow 8.7 per cent in the fiscal year ending March 2022 (FY22) and by 10 per cent in FY23. It said the mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector.
 
While potential remains for a resurgence in coronavirus cases, it said its economic impact would be less pronounced than previous surges due to the sustained improvement in the vaccination rate.
 
"India's strong medium-term growth outlook relative to peers is a key supporting factor for the rating and an important driver of our current baseline of a modestly declining public debt trajectory. We forecast growth of around 7 per cent between FY24 and FY26, supported by the government's reform agenda and the closing of the negative output resulting from the pandemic shock," the agency said.
 
It said the immediate financial-sector pressure has eased and the level of asset quality deterioration from the pandemic also appears less severe. Besides, the recently incorporated National Asset Reconstruction Company or the bad bank could help banks address the expected build-up of impaired loans, while sustaining adequate credit growth.
 
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"Still, we expect credit growth to remain constrained, averaging at 6.7 per cent YoY over the next several years, unless adequate recapitalisation can mitigate the risk aversion currently seen among banks," it said.
 
On the fiscal front, Fitch said the general government deficit will narrow to 10.6 per cent of GDP in FY22 from 13.6 per cent in FY21. "This is consistent with an FY22 central government deficit of 6.9 per cent of GDP, excluding divestment receipts. Per the government's deficit definition, including divestment, this would be 6.6 per cent of GDP, which is slightly below the budget target."
 
Strong revenue growth, particularly from goods and services tax (GST) collection, is facilitating the government to stay within its budget parameters, despite modest additional spending pressure from the second pandemic wave, it added.
 
Fitch said the government has made headway on India's potential inclusion in global bond indices, which could be positive from a credit perspective, as it would open up alternative sources of financing for the government and free up domestic lending.
 
The ratings agency expects inflation in the country to moderate to around 4.5 per cent by the end of FY22 and towards 4 per cent by FY24. "Nevertheless, we believe risks are tilted towards higher inflation, given persistent core inflation, increasing energy prices, and rising inflation expectations."
 
Fitch said failure to put the general government debt to GDP ratio on a downward trajectory or  structurally weaker real GDP growth outlook are the factors that could lead to negative rating action or downgrade.
 
On the other hand, implementation of a credible medium-term fiscal strategy to bring post-pandemic general government debt down toward 'BBB' category peers levels or higher medium-term investment and growth rates without the creation of macroeconomic imbalances can lead to a positive rating action or upgrade, it said.

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