Fitch slashes India’s growth forecast for FY22 to 8.7% from 10%, sovereign rating unchanged
It raised the FY23 forecast to 10%, from 8.5% now, in view of the sharp recovery.
The agency kept the country’s rating unchanged at BBB (- ) with a negative outlook.
“We further lowered India’s GDP forecast for the fiscal year ending March 2022 (FY22) to 8.7% from 10.0% in June as a result of the severe second virus wave,” the agency said in a statement on Thursday.
It said the impact of the second wave was to delay rather than derail India’s economic recovery.
On rating, it said India’s rating balanced 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.
“The negative outlook reflects uncertainty over the debt trajectory following the sharp deterioration in India’s public finances due to the pandemic shock,” it said, adding wider fiscal deficits and government’s 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.
The agency identified implementation of a credible medium-term fiscal strategy to bring general government debt down after the pandemic towards the levels of ‘BBB’ category peers as one of the positive factors for the rating or outlook upgrade. It also flagged higher sustained investment and growth rates in the medium term without the creation of macroeconomic imbalances, such as from successful structural reform implementation, and a healthier financial sector among positive factors.
Factors negatively affecting it included the country’s failure to sufficiently reduce the fiscal deficit to a level consistent with putting the general government debt/GDP ratio on a downward trajectory and a structurally weaker real GDP growth outlook. The agency had in June, 2020 revised its outlook on the rating to negative outlook from stable.
Fiscal Deficit and Inflation
The agency forecast a 7.2% of GDP (excluding disinvestment) for FY22 for the central government.
Buoyant revenue performance largely offsets the higher spending and should help contain the fiscal deficit, it said.
Observing that inflation had hovered around the upper end of the Reserve Bank of India’s (RBI) target inflation band of 2%-6% for the past several months, the agency said it expected it to moderate, which should allow the RBI to keep rates on hold until the next fiscal year.
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