Fitch Revises India's Outlook to Negative, Affirms IDR at 'BBB-'

Fitch Ratings has revised the Outlook on India's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the rating at 'BBB-'. According to the rating agency, the coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden. Fitch expects economic activity to contract by 5% in the fiscal year ending March 2021 (FY21) from the strict lockdown measures imposed since 25 March 2020, before rebounding by 9.5% in FY22. The rebound will mainly be driven by a low-base effect.

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 1% of GDP by our estimates, the rating estimates. Most elements of an announced package totalling 10% of GDP are non-fiscal in nature. 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 FY21 of 2% of GDP, although we do not expect a steep rise in spending.

 

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. Fitch expects general government debt to jump to 84.5% of GDP in FY21 from an estimated 71.0% of GDP in FY20. This is significantly higher than the median of 42.2% of GDP for the 'BBB' category in 2019, to which FY20 corresponds, and 52.6% for 2020. The medium-term fiscal outlook is of particular importance from a rating perspective, but is subject to great uncertainty and will depend on the level of GDP growth and the government's policy intentions.

India's record of fiscal consolidation has been mixed since the 2008 global financial crisis, with the general government debt remaining broadly stable at close to 70% of GDP for over a decade. Double-digit nominal GDP growth has not led to a decline in the government debt ratio in recent years, an important reason being the crystallisation of contingent liabilities and significant off-budget financing. Weak implementation of fiscal rules stipulated in the Fiscal Responsibility and Budget Management Act contributes to our view that a speedy fiscal improvement after the pandemic recedes is unlikely.

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 (NBFC), the rating agency cited. 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. Nonetheless, the banking sector's non-performing loan (NPL) ratio likely improved to 9.0% in FY20 from 11.6% two year earlier, according to our estimate, due to government capital injections.

A renewed rise in NPLs and the need for further financial government support now seem inevitable despite regulatory measures announced by the Reserve Bank of India (RBI). These measures include an extension of the 90-day moratorium on recognition of impaired loans to 180 days and several relaxations in bank lending limits such as allowing banks to fund interest on working-capital loans. These moves will put a heavy onus particularly on public-sector banks to bail out the affected sectors and extend impaired-loan recognition, heightening solvency risks if not met by adequate and timely capital support.

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