Fitch cuts GDP growth projections to 8.7% for FY22 from 10% earlier

A day ahead of policy review, it expects RBI to hold policy rates during FY22

Fitch Ratings has cut economic growth projections for India to 8.7 per cent for the current financial year from earlier forecast of 10 per cent due to the impact of second Covid wave.

It expected the Reserve Bank of India's monetary policy committee (MPC) to hold the policy rate until the next financial year as inflation would moderate. MPC would announce its decision on Friday.  

The growth rate was lowered even as the rating agency said high frequency indicators point to a strong rebound in the second quarter of 2021-22 as business activity has again returned to pre-pandemic levels.

However, it scaled up its forecast for the gross domestic product (GDP) growth for India to 10 per cent for the next financial year from its earlier estimates of 8.5 per cent since "the impact of the second wave was to delay rather than derail economic recovery".

Standard & Poor's recently retained India's GDP growth forecast at 9.5 per cent for the current financial year. On the other hand, Icra raised its projections to nine per cent from 8.5 per cent.

In July, RBI too cut India’s growth forecast to 9.5 per cent from 10.5 per cent estimated earlier. However, it was done before the release of the first quarter GDP figures. India's economy grew by a record 20.1 per cent in that quarter due to low base of 24.4 per cent fall in the corresponding period of the previous financial year.

In its latest report on sovereign overview of Asia-Pacific countries, Fitch did not review sovereign ratings of India or any other country. It is the only rating agency among the three global majors which has a negative outlook on the lowest investment grade for India. Moody's recently upgraded its outlook to stable from negative, while Standard & Poor's already has a stable outlook.

Fitch said the negative outlook reflects uncertainty over the debt trajectory following the sharp deterioration in India's public finances due to the pandemic shock . "Wider fiscal deficits and government plans for only a gradual consolidation put greater onus on India's ability to return to high GDP growth over the medium term to lower the debt ratio," it said.

India's fiscal deficit, for both the Centre and the states, rose to an estimated 14.2 per cent, even as the Centre's fiscal deficit did slightly better than revised estimates. While revised estimates had pegged it at 9.5 per cent of GDP, it actually fell to 9.2 per cent. This year, the combined deficit again might remain in double digits with the Centre's deficit itself pegged at 6.5 per cent of GDP.

Fitch pegged the Centre's fiscal deficit at 7.2 per cent of GDP for the current financial year. However, there is a difference between the methodology of Fitch and the government as the former does not include disinvestment proceeds in revenues.

It said the government on June 28 this year had announced a fiscal package worth about 2.7 per cent of GDP. Much of this consists of loan guarantees, with only 0.6 per cent of GDP in higher onbudget spending.

"However, buoyant revenue performance largely offsets the higher spending and should help contain the fiscal deficit," it said.

The debt to GDP ratio is estimated to have touched 84.2 per cent of GDP in 2020-21 and is likely to have gone even beyond that as the state's budget estimates were incorporated in the calculations.

Fitch said India's rating balances a still-strong medium-term growth outlook and external resilience from solid foreign reserve buffers, against high public debt, a weak financial sector and some lagging structural factors.