Fitch Ratings on Friday, 20 December, cut its growth forecast for India to 4.6 percent for the 2019-20 fiscal from the previous estimation of 5.6 percent after factoring in significant deceleration in past few quarters due to credit squeeze and deterioration in business and consumer confidence.
It reaffirmed India’s rating at ‘BBB-’ with a Stable Outlook saying the rating balances a still strong medium-term growth outlook compared with similar category peers and relative external resilience stemming from solid foreign-reserve buffers against high public debt, a weak financial sector and some lagging structural factors, including governance indicators and GDP per capita.
The Fitch’s FY2019-20 growth forecast is lower than 4.9 percent projection by Moody’s and 5.1 percent by Asian Development Bank. The Reserve Bank of India (RBI) has also revised GDP growth forecast to 5 percent for 2019-20 from 6.1 percent projected in October.
“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 non-banking financial companies (NBFC) and deterioration in business and consumer confidence,” Fitch said in a statement on 20 December.
“We expect growth to gradually recover to 5.6 percent in FY2020-21 and 6.5 percent in FY2021-22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term.”
It said its rating for India incorporates the expectation of moderate slippage in the fiscal deficit target of 3.3 percent of GDP in FY2019-20.
“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.”
“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 government has indicated that its corporate tax rate cut could lower revenue by 0.7 percent of GDP in FY2019-20 and hopes to finance spending by more aggressive asset divestments, 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 percent of GDP in FY2019-20 and a general government deficit of 7.5 percent of GDP.
“We consider it highly unlikely that the government will comply with the general government debt ceiling of 60 percent of GDP by March 2025, as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act.”
The rating agency expected the RBI to cut the policy rate by another 65 basis points in 2020, after a cumulative 135bp easing since February 2019.
The uptick in inflation to 5.5 percent in November appears to reflect a temporary spike in food inflation, while pressure on core inflation, which remained stable at 3.5 percent, seems limited in the current environment, it said.
“The government is likely to remain focused on reforms during the second term of Prime Minister Narendra Modi. It has announced some structural measures over recent months to counter the growth slowdown, including efforts to reduce red tape and boost foreign direct investment. It also plans to consolidate the state-owned banks. The positive impact of these reforms 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.
Fitch said the measures announced to support NBFCs “have not fully arrested liquidity pressure.”
Also, banks generally have thin buffers to deal with continued systemic stress in the NBFC sector, to which their exposure reached 7.4 percent in FY19.
“We estimate that banks are already $7 billion short of the capital required to meet a 10 percent weighted-average common equity Tier 1 ratio by FY21 — the level that we believe would give the banks an adequate buffer above regulatory minimums.”
India, it said, has been less affected so far by global trade tensions than many of its peers — given the comparatively closed nature of its economy, which is not part of the Asian supply chain, and comparatively lower export commodity dependence.
Also, the government has raised trade tariffs on a number of products to curb imports.
“The Indian economy is less developed on a number of structural metrics than many of its peers. Governance remains weak, as illustrated by a low score for the World Bank governance indicator (49th percentile versus the ‘BBB’ median of 59th percentile). India’s ranking on the United Nations Human Development Index (32nd percentile versus the ‘BBB’ median of 67th percentile) also indicates relatively low basic human development. Average per capita GDP also remains low, at $2,102, compared with the ‘BBB’ range median of $USD 12,152,” it added.
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