Fitch downgrades India's sovereign credit rating outlook to negative

Retains ratings at lowest investment grade

Fitch Ratings revised its outlook on India's sovereign ratings on Thursday to ‘Negative’ from ‘Stable’, citing a weakened growth outlook and challenges from a high public debt burden due to the Covid-19 pandemic. Fitch retained its rating at ‘BBB-‘, the lowest investment grade. This comes just weeks after Moody’s cut its rating for India.

As things stand, all three major global ratings agencies – Moody’s, Fitch and Standard & Poor’s – have the lowest investment grade rating on India. Fitch and Moody’s have a negative outlook while S&P has a ‘stable’ outlook which it reaffirmed days ago.

“The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden. Fiscal metrics have deteriorated significantly, notwithstanding the government's expenditure restraint, due to the impact of the severe growth slowdown on revenue, the fiscal deficit and public-sector debt ratios,” the agency said in a report.

Fitch said it expects India’s 2020-21 gross domestic product to contract by 5 per cent, before rebounding by 9.5 per cent in 2021-22, due to a low base effect. “Our forecasts are subject to considerable risks due to the continued acceleration in the number of 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 per cent to 7 per cent as we previously estimated.

The government said that Fitch’s outlook cut was not a cause of concern. “A negative outlook is not surprising given the situation with Covid-19 around the world. The markets seem to factored in today’s action as well as that of Moody’s earlier this month. It is a backward looking action, that is quite obvious,” a senior Finance Ministry official told Business Standard.

“There is a threshold issue about whether or not we are downgraded from being investment grade. That has not happened, and we don’t expect that to happen given our strong fundamentals, including foreign exchange reserves,” the official said.

In its report, Fitch said it expects general government debt to jump to 84.5 per cent of GDP in FY21 from an estimated 71 per cent in FY20. “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, although we do not expect a steep rise in spending,” it said.

The rating agency said the humanitarian and health needs have been pressing, but the government has shown expenditure restraint so far, due to the already high public-debt burden going into the crisis, with additional relief spending representing only about one per cent of GDP.

“The rating agencies have their own ways of looking at problems. The fact of the matter is that the Covid-19 problem is faced by all countries of the world and it is nothing peculiar to India. I don’t think we can attach much importance to these reactions. Everybody knows income growth will be lower this year and can even turn negative. That is something which all countries in the world face,” said former Reserve Bank of India Governor C Rangarajan.

Beyond the pandemic, the agency said that India's medium-term GDP growth outlook may be negatively affected by renewed asset-quality challenges in banks and liquidity issues in non-banking financial companies, something which other ratings agencies have also said.

“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. A renewed rise in NPAs and the need for further financial government support now seem inevitable despite regulatory measures announced by the RBI,” it said, adding that it expects the RBI to cut its policy rate by at least another 25bp this fiscal year.

Fitch also touched upon recent geopolitical flare-ups, including with China and Pakistan. “Geopolitical risk related to longstanding border issues with India's neighbours was highlighted again by recently intensified tensions with China.”

“A stronger focus by the ruling Bharatiya Janata Party 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 said.

WHAT FITCH SAYS

• Covid-19 has led to weakened growth outlook and high public debt risks
• Govt has shown expenditure restraint in face of severe humanitarian odds
• Liquidity issues, NPAs in financial system remain a concern
• Recent geo-political incidents also add to risk
• Govt’s Hindu-nationalist agenda could distract from reform implementation