India’s medium-term growth outlook critical in ratings: Fitch

11 February, 2021 12:00 AM printer

NEW DELHI: Global rating agency Fitch said on Wednesday that India’s medium-term growth outlook will assume a more critical role in sovereign assessment due to higher deficits and a slower consolidation path.

“The Union Budget (for 2021-22) points to a loosening of fiscal policy to support ongoing economic recovery from the pandemic. It will consequently lead to a rise in public debt. The debt as per cent of Gross Domestic Product (GDP) trajectory is core to our sovereign rating assessment, Fitch Ratings said in a statement, report agencies.

The agency had revised the outlook on India’s ‘BBB-’ rating to negative from stable in June 2020, partly owing to assumptions about the impact of the pandemic on its public finance metrics.

India entered the pandemic with little fiscal headroom from a rating perspective. Its general government debt-to-GDP ratio stood at 72 per cent in 2019, against a median of 42 per cent for ‘BBB’ rated peers.

The rating agency expects public debt/GDP to rise above 90 per cent of GDP over the next five years, based on the revised budget targets and with other previous rating assumptions remaining unchanged. However, recent reforms and policy measures, including those announced in the budget, could also influence our growth expectations and, thus, our debt trajectory forecasts.

The rating agency’s latest economic outlook projected growth at 11 per cent in FY22, and at about 6.5 per cent a year to FY26. This pace of expansion reflects base effects and the closing of output gaps after the pandemic shock.

Overall, the 2021 budget has the potential to lift growth prospects. Higher expenditure will support the near-term recovery and increased infrastructure spending could boost sustainable medium-term growth rates.

The labour market and agricultural reforms that were legislated in September 2020 could also lift medium-term growth. However, recent adverse court rulings have highlighted implementation challenges to these reforms and there is a risk that fiscal spending could also fall short of planned levels.

Although there are implementation risks around aspects of the budget, the government’s overall fiscal projections as broadly credible. The budget’s higher deficit forecasts are partly driven by positive steps toward greater transparency. The previously off-balance-sheet items, such as loans from the Food Corporation of India, have been brought on budget.

The extent to which policy changes address weaknesses in India’s financial sector will also influence the country’s medium-term growth potential, it added.

 


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