September 25, 2022

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India GDP: Economy on strong footing; Why Fitch rating has revised India’s outlook to stable from negative | India Business News

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NEW DELHI: Rating agency Fitch Ratings has revised India’s soverign outlook from negative to stable, citing diminished risks to India’s medium-term growth due to rapid economic recovery and a healthier financial sector despite near-term headwinds from the global commodity price shock. It however, has cut India’s growth forecast for FY23 to 7.8 percent from 8.5 percent earlier due to inflationary impact of global commodity prices.
It sees India’s growth at around 7% between FY24 to FY27 and expects the Reserve Bank of India to raise the repo rate to 6.15% by FY24.
“High nominal GDP growth has facilitated a near-term reduction in the debt-to-GDP ratio, but public finances remain a credit weakness with the debt ratio broadly stabilising, based on our expectation of persistent large deficits. The rating also balances India’s external resilience from solid foreign-exchange reserve buffers against some lagging structural indicators,” noted Fitch in a note.
Recovery Puts Economy on Stronger Footing:
India’s economy continues to see a solid recovery from the Covid-19 pandemic shock, said Fitch as the GDP recovered by 8.7% in the fiscal year ended March 2022 (FY22).
Fitch forecast GDP growth at 7.8% in FY23. However, this is a downward revision from its 8.5% forecast in March as the inflationary impacts of the global commodity price shock are dampening some of the positive growth momentum.
Solid Medium-Term Growth Prospects:
India’s strong medium-term growth outlook relative to peers is a key supporting factor for the rating, said Fitch. It forecast growth of around 7% between FY24 and FY27, underpinned by the government’s infrastructure push, reform agenda and easing pressures in the financial sector. However, it cautions that challenges remain given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms.
Financial-Sector Pressures Easing:
Conditions in the financial sector were a key growth impediment before the pandemic, but have improved in recent years, which should facilitate better credit allocation and investment in the medium term, it said.
“Banks’ capital sufficiency will be important in determining their ability to provide more credit. Potential asset-quality deterioration from the pandemic shock appear manageable, but there are risks as forbearance measures unwind amid heightened global macroeconomic uncertainty,” noted Fitch
India’s debt-to-GDP ratio benefits in the near term from a sharp acceleration in nominal GDP growth
” We forecast the debt-to-GDP ratio to drop to 83.0% in FY23 from a peak of 87.6% in FY21, but it remains high compared to the 56% peer median. Beyond FY23, however, our expectations of only a modest narrowing of the fiscal deficit and rising sovereign borrowing costs will push the debt ratio up slightly to around 84.0% by FY27, even under an assumption of nominal GDP growth of around 10.5%,” said Fitch.
Fitch believes India’s fiscal deficit will remain broadly stable at 10.5% of GDP (excluding divestment) in FY23, compared to 10.7% in FY22.
“In its budget, the central government prioritised capital expenditure over more substantial fiscal consolidation. We forecast that the fuel excise-duty cuts and increased subsidies (about 0.8% of GDP) announced in May to offset higher commodity prices for consumers, will push the central government deficit to 6.8% of GDP compared to the budget’s 6.4% target, despite robust revenue growth,” noted Fitch.
Domestic Borrowing Needs Remain High:
Risks associated with India’s high public debt are partly offset by the country’s ability to finance its deficits domestically, which is a strength relative to most ‘BBB’ peers, said Fitch Ratings.
Foreign-currency government debt comprises only 5% of total debt and only 2% of government securities are held by non-residents. But it warned that sustained large fiscal financing needs are likely to contribute to a crowding out of private-sector lending and higher borrowing costs.
Inflationary Pressures Rise:
Fitch expects inflation to remain elevated in FY23 at 6.9% due to the sharp rise in global commodity prices and underlying demand pressures and thinks the RBI will continue to withdraw liquidity and raise rates, with the repo rate reaching 6.15% by FY24.
Resilient External Finances:
External risks remain relatively well-contained, despite the sharp rise in oil prices. Fitch forecast the current account deficit to rise to 3.1% of GDP in FY23 from 1.5% in FY22 on the back of a higher oil import bill, but resilient exports will mitigate the deterioration. Large foreign-exchange buffers, which reached $607 billion by FYE22 (9 months of imports), will help the country manage financial market volatility emanating from global monetary-policy tightening.
Key risks that could result in a negative rating include:
– Public Finances: Rising general government debt/GDP ratio, for instance, from insufficient fiscal consolidation.
– Macro: A structurally weaker real GDP growth outlook, for instance, due to financial-sector weakness or reform implementation that is lacking, further weighing on the debt trajectory.