Fitch slashes India’s GDP growth rate to 0.8 per cent

Global rating agency Fitch on Tuesday sharply cut India’s GDP growth rate to 0.8 per cent during current fiscal, which is the lowest growth projection so far.

“(Reduction) reflecting the impact of the coronavirus pandemic and official efforts to contain it. This is down sharply from our forecast of 5.6 per cent prior to the outbreak,” the agency said. Though, it expects growth to rebound to 6.7 per cent in 2021-22, it feels there is a risk that the crisis could amplify the fiscal and financial sector strains and hurt the country’s growth prospects over the medium term.

Fitch’s projection is lower than IMF’s estimate of 1.9 per cent and the World Bank’s estimate of 1.5-2.8 per cent. It is also in contrast to its group company, India Ratings & Research’s (Ind-Ra) projection of 1.9 per cent.

On Monday, another agency Crisil cut its forecast to 1.8 per cent from last revised number of 3.5 per cent. The government is yet to revise its projection of 6-6.5 per cent as it is waiting for the growth numbers of the January-March quarter of FY 2019-20 and April-June quarter of FY 2020-21.

In December before the onset of the Covid-19, Fitch affirmed India’s rating at ‘BBB Minus’ with a Stable Outlook. This is the last investment grade and stable outlook means that a revision will take place only after some time depending on the various factors mainly fiscal.

According to Fitch, further deterioration in the fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when the Covid crisis emerged.

“Our assessment of India’s rating in such a case would be guided by our judgement of its probable medium-term fiscal path in the post-crisis environment. The government may tighten fiscal policy again once the pandemic is under control, but India’s record of meeting fiscal targets and implementing fiscal rules has been mixed in recent years, which will colour our assessment of any official commitment to tighten fiscal policy over the medium term,” it said.

Further, it mentioned that the country has limited fiscal space to respond to the challenges posed by the health crisis. General government debt stood at 70 per cent of GDP in FY20, according to Fitch’s estimate, well above the ‘BBB’ rated sovereigns’ median of 42 per cent.

“India’s relatively robust external position supports its sovereign rating, and has helped to offset its comparatively weaker fiscal metrics,” it said.

Risks to the medium-term economic outlook will increase if India experiences another bout of stress in its financial system. The current slowdown will reverse at least some of the improvement of the past few years in banking sector’s health.

“Prolonged financial-sector weakness could weigh on credit growth, economic output, investment and productivity,” the agency cautioned.

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