Economy

Coronavirus impact: Fitch cuts India’s FY21 GDP growth forecast to 0.8%

Updated : April 28, 2020 12:59 PM IST

The rating agency expects India’s growth to rebound to 6.7 percent in FY22.

Fitch expects India’s ratio of public debt/GDP to rise to over 77 percent of GDP in FY21.

Fitch Ratings has revised down its economic growth forecast for India to 0.8 percent in FY21, reflecting the impact of the coronavirus pandemic and official efforts to contain it. This is down sharply from its earlier forecast of 5.6 percent prior to the outbreak.

The rating agency expects India’s growth to rebound to 6.7 percent in FY22 but flagged a risk that crisis could amplify fiscal and financial sector strains and hurt the country’s growth prospects over the medium term.

On April 20, Fitch had cut India's economic growth forecast for the financial year 2020-21 to 1.8 percent saying private consumption is likely to contract due to large-scale loss of income in the face of worsening domestic outbreak of COVID-19.

Fitch expects India’s ratio of public debt/GDP to rise to over 77 percent of GDP in FY21 — up from a forecast of 71 percent when it affirmed the rating in December — and to stay on an upward track in FY22.

“This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” it added.

Noting the steps taken by the Reserve Bank of India (RBI) towards easing monetary policy, Fitch said that the risks to the medium-term economic outlook will increase if India experiences another bout of stress in its financial system.

The current slowdown will reverse at least some of the improvements of the past few years in banking-sector health. Prolonged financial-sector weakness could weigh on credit growth, economic output, investment and productivity, it added.

The rating agency expects the government to announce additional fiscal easing to support growth, given the extended lockdown. Further deterioration in the fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when it entered this crisis.

“Our assessment of India’s rating in such a case would be guided by our judgement of its probable medium-term fiscal path in the post-crisis environment. The government may tighten fiscal policy again once the pandemic is under control, but India's record of meeting fiscal targets and implementing fiscal rules has been mixed in recent years, which will colour our assessment of any official commitment to tighten fiscal policy over the medium term,” the agency said.

Coronavirus impact: Fitch cuts India’s FY21 GDP growth forecast to 0.8%

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