Fitch Ratings has revised its outlook on India’s long-term foreign currency issuer default rating (IDR) to negative from stable and affirmed the rating at ‘BBB-‘. It expects economic activity to slump by 5 percent in FY21 due to lockdown imposed to curb COVID-19.
“Rebound of 9.5 percent is expected in FY22, driven majorly by low-base effect,” it said.
The credit ratings agency (CRA) noted that the coronavirus pandemic “significantly weakened India’s growth for the year and exposed challenges associated with a high public debt burden.”
With this, two major CRAs – Fitch and Moody’s have expressed negative outlook on India, while S&P had a stable rating. All three however have ‘BBB-‘ rating for India, which is the lowest investment grade.
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“Our forecasts are subject to considerable risks due to continued acceleration in new COVID-19 cases as the lockdown is eased gradually. It remains to be seen whether India can return to sustained growth rates of 6- 7 percent as we previously estimated, depending on the lasting impact of the pandemic, particularly in the financial sector,” the agency stated.
It also pointed out that while humanitarian and health needs have been pressing, the government has so far shown “expenditure restraint with additional relief spending representing only about 1 percent of GDP by our estimates.” This was attributed to the already high public-debt burden.
On the financial stimulus package announced by Finance Minister Nirmala Sitharaman Fitch added that most elements – totalling 10 percent of GDP are non-fiscal in nature.
“Some further fiscal spending of up to 1 percentage point of GDP may still be announced in the next few months, which was indicated by a recent announcement of additional borrowing for FY21 of 2 percent of GDP, although we do not expect a steep rise in spending,” it added.
The agency noted that fiscal metrics have “deteriorated significantly”, despite the Centre’s restraint as severe growth slowdown has hit revenue, fiscal deficit and public-sector debt ratios.
“We expect general government debt to jump to 84.5 percent of GDP in FY21 from an estimated 71.0 percent of GDP in FY20. This is significantly higher than the median of 42.2 percent of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6 percent for 2020. The medium-term fiscal outlook is of particular importance from a rating perspective, but is subject to great uncertainty and will depend on the level of GDP growth and the government's policy intentions,” it said.
It further noted that renewed asset-quality challenges in banks and liquidity issues in non-banking financial companies (NBFC) could drag India's medium-term GDP growth outlook.
“The financial sector was already facing weak business and consumer confidence before the crisis and authorities had to deal with some high-profile cases over lapses in governance,” it said.
Fitch pointed out that while the banking sector's non-performing loan (NPL) ratio likely improved to 9.0 percent in FY20 from 11.6 percent two years earlier, due to government capital injections; a renewed rise in NPLs and the need for further financial government support now seem inevitable despite regulatory measures announced by the Reserve Bank of India (RBI).
“These measures include an extension of the 90-day moratorium on recognition of impaired loans to 180 days and several relaxations in bank lending limits such as allowing banks to fund interest on working-capital loans,” it said, acknowledging that these moves will put a heavy onus particularly on public-sector banks to bail out the affected sectors and extend impaired-loan recognition, heightening solvency risks if not met by adequate and timely capital support.
Other reasons listed for the ‘BBB-' rating include the “closed nature of India’s capital markets where only 4 percent of government securities are held by non-residents and the external liabilities account for just 6 percent of the Centre’s debt.”
It also noted geopolitical risk related to longstanding border issues with Pakistan and China, the latter with whom India is currently engaged in a standoff at the Ladakh border; repeal of special status for Kashmir and recent changes to the status of illegal immigrants based on their religion, as negative factors.
“A stronger focus by the ruling BJP on its Hindu-nationalist agenda since the government's re-election in May 2019 risks becoming a distraction for economic reform implementation and could further raise social tensions,” it stated.
The Indian economy is less developed on a number of structural metrics than many of its peers, it added, noting that India's ranking for Ease of Doing Business has drastically improved in recent years; at the 68th percentile it is now comparable, albeit still below, the 'BBB' median of the 71st percentile.
“India's relatively low basic human development is indicated by its ranking on the United Nations Human Development Index (32nd percentile versus the BBB median of 67th percentile), while average per capita GDP also remains low, at $2,100, compared with the 'BBB' range median of $12,172,” the agency added.
“India has an ESG Relevance Score of 5 for both Political Stability and Rights, and the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. India has a medium World Bank Governance Indicator ranking at the 49th percentile (below the BBB median of 58th percentile), reflecting a recent record of peaceful political transitions, moderate institutional capacity and established rule of law, but a high level of corruption,” Fitch said.