S&P retains India’s BBB-rating as economy opens
Fitch predicts 9.5% growth in 2021-22 financial year
NEWDELHI: S&P Global Ratings on Wednesday retained India’s lowest investment grade (BBB-) credit rating with stable outlook as it expects the country’s economy and fiscal position to stabilise and begin to recover from 2021 onwards.
The affirmation of India’s sovereign rating comes as a huge relief to the government as Moody’s Investors Service downgraded India’s sovereign rating one notch to the lowest investment grade with negative outlook as recently as last week. Fitch Ratings on Wednesday said lack of a credible medium-term strategy for stabilising rising public debt in India after the coronavirus crisis subsides could put downward pressure on the sovereign rating.
Fitch Ratings forecast a 5 per cent contraction in India’s GDP in 2020-21 fiscal but saw a rebound in the next to 9.5 per cent growth.
“While risks to India’s longterm growth rate are rising, ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers. The economic hit from Covid-19 will exacerbate India’s weak fiscal settings. We expect a materially larger fiscal deficit this year, followed by consolidation over the next three years,” S&P said.
However, S&P cautioned that downward pressure on India’s sovereign rating could emerge over the next 1-2 years if India’s GDP growth fails to meaningfully recover from 2021, and its trend growth rate falls towards the average of its peers; and net general government deficits materially exceed S&P’s forecasts, signifying a weakening of India’s institutional capacity to maintain sustainable public finances.
On the upside, S&P could upgrade India’s rating if the government significantly curtails its fiscal deficits, resulting in materially lower net indebtedness at the general government level.
The rating agency expects a spike in the general (Centre and states) government’s fiscal deficit to 11% of GDP in FY21.
“We consider the proposed float of shares of governmentowned Life Insurance Corp. of India (LIC) to be crucial for the government to consolidate its fiscal position following the spike in the deficit this year,” it added.
On balance, we expect the deficit to decline meaningfully next year, well below 10% of GDP, assuming that the economy has stabilised and entered into recovery,” it said.
S&P said its stable outlook for India reflects expectation that the economy will recover after the containment of the Covid-19 pandemic, and the country will maintain its sound net external position.
S&P has projected the Indian economy to contract by 5% in FY21 before making a strong recovery to grow at 8.5% in FY22. “The economy’s long-term outperformance (of its peers) highlights its resilience. India’s wide range of structural trends, including healthy demographics and competitive unit labour costs, work in its favour. A more favourable corporate tax regime, which is particularly supportive of manufacturing firms, should reinforce growth, alongside additional fiscal and monetary easing,” it added.
The rating agency said Prime Minister Narendra Modi’s robust mandate may empower the government to adopt and enact important economic reforms such as further liberalisation of labour markets and investment framework.
Last month, the government announced a ₹20 lakh crore financial package to ease liquidity conditions for small industries and support vulnerable sections of the society.