Growth prospects to drive India’s rating: Fitch

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February 11, 2021 3:00 AM

The proposed establishment of the so-called bad bank to deal with bad banking sector assets should be credit positive, subject to details of its structure and implementation.

Fitch has projected India’s real growth at 11% in FY22 then at around 6.5% a year through to FY26. “This pace of expansion reflects base effects and the closing of output gaps after the pandemic shock,” it said.Fitch has projected India’s real growth at 11% in FY22 then at around 6.5% a year through to FY26. “This pace of expansion reflects base effects and the closing of output gaps after the pandemic shock,” it said.

India’s elevated deficit projections up to FY26 announced in the Budget will make it more challenging to reduce its debt-to-GDP ratio, which could rise above 90% over the next five years, global rating agency Fitch said on Wednesday.

Given the spike in both fiscal deficit and debt levels in the wake of the Covid-19 pandemic, India’s medium-term growth outlook will play a more critical role in the assessment of its sovereign rating, Fitch added.

Before the pandemic, the agency said, India’s debt was 72% of GDP (in 2019). The government now targets to lower fiscal deficit to 4.5% of GDP by FY26 from as high as 9.5% in FY21.

Fitch has projected India’s real growth at 11% in FY22 then at around 6.5% a year through to FY26. “This pace of expansion reflects base effects and the closing of output gaps after the pandemic shock,” it said.

There is a risk that fiscal spending could also fall short of planned levels and the budget’s proposed increase in import tariffs could dampen trade and economic growth, it said. Even proposed reforms face implementation challenges.

It said the budgeted capital infusion of `20,000 crore into state-run banks will be “insufficient to alleviate the anticipated incremental stress” this year and the next. Plans to privatise two state banks could also be significant, but it could face implementation challenges, according to Fitch.

Nevertheless, the budget for FY22, in aggregate, has the potential to lift growth prospects. “Higher expenditure will support the near-term recovery and increased infrastructure spending could boost sustainable medium-term growth rates. Labour market and agricultural reforms that were legislated in September 2020 could also lift medium-term growth,” it said.

The proposed establishment of the so-called bad bank to deal with bad banking sector assets should be credit positive, subject to details of its structure and implementation.

Fitch also maintained that recent reforms and policy measures, including those announced in the budget, could also “influence our growth expectations and, thus, our debt trajectory forecasts”.

State banks are likely to continue to experience asset-quality problems, weak profitability and small capital buffers and, as a result, we project credit growth to remain soft in the absence of further government action, Fitch said.

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