Projections for 2021-22 compare to a 7.3% contraction recorded in the last fiscal year and 4% growth in 2019-20
Fitch Ratings cut India’s economic growth forecast to 8.7% for the current fiscal year, but raised the GDP growth projection for fiscal year 23 to 10%, claiming that the second wave of COVID- 19 delayed rather than derailed the economic recovery.
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In its APAC Sovereign Credit Overview, Fitch Ratings stated that India’s “BBB- / Negative†sovereign rating “balances still strong medium-term growth prospects and the external resilience of strong foreign exchange reserves, against public debt. high, a weak financial sector and some lagging structural factors â€.
The “negative†outlook, he said, reflects uncertainty over the debt trajectory following the sharp deterioration in India’s public finances due to the pandemic shock.
Fitch said he further lowered India’s GDP forecast for the fiscal year ending March 2022 (FY22) to 8.7% from 10% in June due to the severe second wave of the virus.
It had reduced the growth forecast by 12.8% in June.
Projections for 2021-22 compare to a 7.3% contraction recorded in the last fiscal year and 4% growth in 2019-20.
“In our view, however, the impact of Wave 2 has been to delay rather than derail India’s economic recovery, reflected in an upward revision to our GDP forecast for fiscal year 23 (April 2022-March 2023) at 10% against 8.5% in June â€, It said.
High-frequency indicators point to a strong rebound in the second quarter of the current fiscal year (April 2021-March 2022), as business activity has again returned to pre-pandemic levels.
Fitch, however, experienced a larger budget deficit.
“We expect a rate of 7.2% of GDP [excluding disinvestment] Central government deficit in fiscal year 22, â€he said.
On June 28, the government announced a tax package worth around 2.7% of GDP. Much of this consists of loan guarantees, with only 0.6% of GDP more on budget spending.
“However, the good revenue performance more than offsets the increase in spending and should help contain the budget deficit,” he said.
“The larger budget deficits and the government’s plans for only gradual consolidation are putting more pressure on India’s ability to return to high GDP growth in the medium term to reduce the debt ratio.” Inflation has hovered around the upper end of the Reserve Bank of India‘s (RBI) target inflation range of 2-6% in recent months as pressure on commodities drove higher the costs.
The RBI has kept its repo rate at 4% since March 2020, as it has focused on supporting the economy and sees the pressure as temporary.
“We expect inflation to moderate, which should allow the RBI to hold rates until the next fiscal year,” Fitch said.
Listing negative sensitivities, he said he had not sufficiently reduced the budget deficit to a level consistent with a downward trajectory in the public debt-to-GDP ratio and structurally weaker real GDP growth prospects due to continued weakness in the financial sector. or the lack of implementation of reforms. .
On the positive side, the implementation of a credible medium-term fiscal strategy to bring government debt after the pandemic back to the levels of its peers in the “BBB†category.
In addition, higher and sustained investment and growth rates in the medium term without creating macroeconomic imbalances, such as the successful implementation of structural reforms and a healthier financial sector.
The RBI also cut India’s growth forecast in July to 9.5% for this fiscal year, from an earlier estimate of 10.5%.
While S&P Global Ratings has lowered its growth estimate to 9.5%, another US-based rating agency, Moody’s, has forecast growth of 9.3% for the current fiscal year ending March 2022. For calendar year 2021, Moody’s sharply reduced the growth estimate to 9.6%.
In June, the World Bank cut its GDP growth forecast for fiscal 22 to 8.3 percent from an estimated 10.1 percent in April, saying the economic recovery is being hampered by the devastating second wave of infections in coronavirus.
The national rating agency Icra had forecast economic growth of 9% for this fiscal year last month, while the British brokerage firm Barclays in May forecast India to grow at 9.2%.
