Second wave push to lower our GDP forecast in India: Jeremy Zook, Director (Sovereign Ratings), Fitch Ratings

But this will need to be reassessed as the impact of the virus outbreak on India’s GDP growth and public finances becomes clearer.

Fitch Ratings’ assessments will focus on India’s medium-term growth prospects and the likelihood of keeping the debt path on a downward path, said Jeremy Zook, the agency’s director (sovereign ratings). He told FE’s Banikinkar Pattanayak that structural reforms aimed at boosting growth and closing infrastructure gaps could improve India’s prospects if implemented well. Edited excerpts:

What is your forecast for India’s debt ratio for fiscal 22, given the impact of the second wave of Covid-19?
The surge in Covid-19 cases in the second wave will cause our GDP growth forecast for fiscal 22 to decline (previously 12.8% compared to our quarterly economic outlook for March 2021), due to the attenuation of activity due to mobility restrictions. We expected the FY22 debt to equity ratio to decline 2.5 percentage points from 90.6% in FY21. But this will need to be reassessed as the impact of the virus outbreak on India’s GDP growth and public finances becomes clearer.

How will a high debt burden impact India’s public finances and sovereign rating?
We confirmed India’s “BBB-” sovereign rating in April 2021, with a “negative” outlook that has been in place since June 2020. (The outlook indicates in which direction a rating is likely to move over a period of time. ‘one to two years.) The “negative” outlook reflects the uncertainty over the medium-term path of the public debt-to-GDP ratio, in our view, given the significant deterioration in this ratio over the past year. India has the highest debt ratio of emerging market sovereigns rated “BBB”, at around 90% of GDP, and has limited fiscal space from a rating standpoint.

Our rating assessments will focus on India’s medium-term growth outlook and the likelihood of keeping the debt path on a downward path.

The rating would come under additional pressure from a deterioration in the trajectory of the debt ratio resulting from weaker medium-term growth prospects or from a further widening of fiscal deficits.

The government mapped out a gradual fiscal consolidation path in its February budget, targeting a 4.5% deficit by FY26. This pace of consolidation seems credible to us, and the commitment to greater budget transparency is welcome. However, there are of course risks involved in achieving these goals. In particular, the large deficit and high level of public debt require India’s medium-term GDP growth outlook to stabilize and reduce the debt ratio. Growth-friendly structural reforms and reducing infrastructure deficits could improve the outlook if implemented well in our view.

Is there a chance that the debt ratio will fall to pre-pandemic (FY20) levels in the medium term?
We do not expect India’s debt ratio to decline to its pre-pandemic FY20 level of 73.9% over our 5-year debt trajectory horizon. According to our current forecast, India’s general government debt level will reach 89% of GDP by FY25 and follow a gradual downward path thereafter.

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