Fitch cuts India's GDP growth to 4.6% as credit crunch cripples economy

The rating agency sees moderate fiscal slippage, retains sovereign rating and outlook

Fitch Ratings on Friday cut India’s economic growth forecast to 4.6 per cent from its earlier projection of 5.6 per cent for the financial year 2019-20 (FY20) as credit squeeze and deterioration in business and consumer confidence over the past few quarters hurt growth.

The move includes the expectation of moderate slippage in the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) in FY20, it said in a statement.

Fitch, however, retained India’s sovereign rating at the lowest investment grade of ‘BBB-’ and outlook at stable.

The rating agency expected the Reserve Bank of India (RBI) to cut policy rate by another 65 basis points (bps) in 2020 as uptick in the consumer price index (CPI)-based inflation rate to 5.5 per cent in November appears to reflect a temporary spike in food inflation.

It said pressure on core inflation, which remained stable at 3.5 per cent, seems limited in the current environment. The RBI has cut the rate by 135 bps cumulatively since February this year, but refrained from any reduction in its December policy review because of hardening food inflation.

Fitch said banks have thin buffers to deal with continued stress in the non-banking financial companies (NBFC) sector. Banks exposure has already reached 7.4 per cent in FY19. 

It estimated that banks are $7 billion short of the capital required to meet 10 per cent weighted-average common equity tier 1 ratio by FY21 — the level that would give them an adequate buffer above regulatory minimum.

The rating agency attributed its move has factored in the economy balancing a strong medium-term growth outlook and solid foreign-reserve buffers with high public debt, a weak financial sector and some lagging structural factors, including governance indicators and GDP per capita.

Fitch said the measures announced to support NBFCs have not fully arrested liquidity crunch and hoped that the Modi government 2.0 is likely to focus on reforms.

Fitch’s growth forecast is lower than what the economy clocked in the first half at 4.6 per cent, meaning the expectation is that the economy may slow further in the second half of the current financial year. The projection is lower than what Moody’s Investors Service estimated, at 4.9 per cent. Fitch is also more pessimistic than the RBI which predicted the economy to grow by 5 per cent in FY20.

“Our outlook on India’s GDP growth is still solid against that of peers, even though growth has decelerated significantly over the past few quarters, mainly due to domestic factors, in particular, a squeeze in credit availability from NBFCs and deterioration in business and consumer confidence,” Fitch said.

It expected the growth to gradually recover to 5.6 per cent in FY21 and 6.5 per cent in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term.

The positive impact of the reforms recently undertaken on growth is likely to materialise in the medium term, rather than the near term, and will depend on the details and implementation, Fitch said.

The government is again facing a trade-off between stimulating the economy and reducing the deficit in the medium term. Some fiscal slippage has occurred in recent years against government targets, even during periods of sustained stronger growth, it said.

“The FY20 deficit target had already been exceeded by end-October due to a weak revenue intake, and deceleration of nominal quarterly growth suggests further revenue pressure for the rest of the financial year,” it said.

The Centre’s fiscal deficit crossed the entire year’s target by 2.4 per cent by October itself against 3.9 per cent a year ago.

Fitch also said the government has indicated that its corporation tax rate cut could lower revenue by 0.7 per cent of GDP in 2019-20 and it hoped to finance spending by more aggressive asset divestment, including Air India and Bharat Petroleum Corporation.

“We believe there is a risk of more significant fiscal loosening in the event of continued weak GDP growth, for example, in the context of lingering problems in the NBFC sector,” it said.

Fitch expects a general government debt level of 70.4 per cent of GDP in FY20 and a general government fiscal deficit (the Centre and states combined) of 7.5 per cent of GDP.

“We consider it highly unlikely that the government will comply with the general government debt ceiling of 60 per cent of GDP by March 2025, as stipulated in the Fiscal Responsibility and Budget Management Act.” 

India, it said, has been less affected so far by global trade tensions than many of its peers — because of the comparatively closed nature of its economy, which is not part of the Asian supply chain, and lower export commodity dependence. The government’s decision to raise trade tariffs on a number of products to curb imports has also helped, it said.