Fitch refuses to do a Moody’s, retains India’s outlook at negative

Fitch Ratings has retained India’s ratings at the lowest investment grade and outlook on them at negative due to high debt and limited fiscal headroom of the central and the state governments. The move on outlook is in contrast to that of Moody’s Investors Service which recently upgraded outlook to stable from negative.

With this, Moody’s and Standard & Poor’s have a stable outlook on their ratings on India, while Fitch still has a negative outlook. All three rating agencies have given India the lowest investment grade.

Fitch said 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, it said.

It said the medium-term debt trajectory remains core to its rating assessment, as higher debt levels constrain the government’s ability to respond to shocks and could lead to a crowding out of financing for the private sector.

The general government debt rose to 89.6 per cent of GDP during FY21, the highest among emerging-market peers.

“We forecast the ratio to decline slightly to 89 per cent, still well above the 60.3 per cent median among similarly rated economies in 2021.

The debt ratio should fall to 86.9 per cent by FY’26 under our medium-term baseline forecasts, assuming 10.5 per cent nominal growth and the gradual consolidation of the general government primary deficit to 2.5 per cent of GDP, ” it said.

Risks to this forecast include India’s weak record of fiscal consolidation; Fitch said. It cited that the government debt fell between the 2007-2008 global financial crisis and FY’15, but then rose gradually despite double-digit nominal GDP growth.

Risks associated with India’s high public debt are partly offset by the country’s ability to finance its deficits domestically, which is a strength relative to most rated peers.

Fitch forecast robust GDP growth of 8.7 per cent during 2021-22 and ten per cent during FY’23, supported by the resilience of India’s economy, which has facilitated a swift cyclical recovery from the Delta Covid-19 variant wave in 2Q21. It forecast the GDP growth to be around seven per cent between FY’24 and FY’26.

The rating agency said mobility indicators have returned to pre-pandemic levels and high-frequency indicators point to strength in the manufacturing sector.

It said the government’s production-linked incentive scheme to boost foreign direct investment, labour reform and the creation of a ‘bad bank’, along with an infrastructure investment drive and the National Monetisation Pipeline, should support the growth outlook if fully implemented.

Nevertheless, there are challenges to this outlook, given the uneven nature of the economic recovery and reform implementation risks.

Even as it said that the immediate financial sector pressure has eased, the rating agency still expected 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. Pegging inflation rate to moderate to around 4.5 per cent by the end of the current financial year, Fitch said risks are tilted towards higher inflation, given persistent core inflation, increasing energy prices, and rising inflation expectations.

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