Due to the high level of debt and the limited fiscal space of the central government and the states, Fitch Ratings has left India’s ratings at the lowest investment grade and the outlook on negative. The development of the outlook is in contrast to that of Moody’s Investors Service, which recently raised the outlook from negative to stable.

This means that Moody’s and Standard & Poor’s have a stable outlook for their ratings for India, while Fitch continues to have a negative outlook. All three rating agencies have given India the lowest investment grade.

Fitch said the negative outlook for the rating reflects ongoing uncertainty about medium-term debt histories, especially given India’s limited fiscal space compared to other rating firms.

The medium-term debt pathway remains at the core of its rating as higher debt could limit the government’s ability to respond to shocks and crowd out private sector funding.

General government debt rose to 89.6 percent of GDP in FY21, the highest among emerging economies.

“We forecast that the rate will drop slightly to 89 percent, still well above the median of 60.3 percent among similarly rated economies in 2021.

According to our medium-term base projections, the debt ratio should decrease to 86.9 percent by fiscal year 26, assuming nominal growth of 10.5 percent and a gradual consolidation of the general government primary deficit to 2.5 percent of GDP, ”it said.

Risks to this forecast include India’s poor fiscal consolidation record; said Fitch. It stated that national debt declined between the global financial crisis of 2007-2008 and fiscal year 2015, but then gradually increased despite double-digit nominal GDP growth.

The risks associated with India’s high national debt are partially offset by the country’s ability to fund its deficits domestically, which is a strength when compared to most of its other rated competitors.

Fitch forecasts robust GDP growth of 8.7 percent in 2021-22 and ten percent in FY’23, helped by the resilience of the Indian economy, which is seeing a rapid cyclical recovery from the Delta-Covid-19 variant wave in the second quarter 21 made possible. They forecast GDP growth between FY’24 and FY’26 at around seven percent.

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

The government’s production-related incentive system to encourage foreign direct investment, labor reforms and the creation of a bad bank, as well as infrastructure investments and the national monetization pipeline should support the growth prospects if fully implemented.

However, given the unevenness of the economic recovery and the risks involved in implementing the reforms, there are some challenges to this outlook.

Although immediate pressures on the financial sector have eased, the rating agency continues to expect limited credit growth averaging 6.7 percent year-over-year over the next several years, unless appropriate recapitalization can mitigate the risk aversion currently observed among banks. The inflation rate is slated to drop to around 4.5 percent by the end of the current fiscal year, Fitch said that given continued core inflation, rising energy prices and rising inflation expectations, the risks are focused on higher inflation.

Dear Reader,

Business Standard has always endeavored to provide updated information and commentary on developments that are of interest to you and have far-reaching political and economic implications for the country and the world. Your encouragement and constant feedback to improve our offering has only strengthened our determination and commitment to these ideals. Even in these troubled times resulting from Covid-19, we continue to strive to keep you updated with credible news, authoritative views, and concise comments on current affairs.
However, we have a request.

In the fight against the economic effects of the pandemic, we need your support even more so that we can continue to offer you high-quality content. Our subscription model has received an encouraging response from many of you who have subscribed to our online content. More subscriptions to our online content can only help us achieve our goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism to which we are dedicated.

Support quality journalism and Subscribe to Business Standard.

Digital editor