After contracting in the current financial year, India's economy has been forecasted to bounce back with a sharp growth rate of 9.5 percent next year, provided that it avoids further deterioration in financial sector health, Fitch Ratings said on Wednesday.
The coronavirus pandemic will shrink an already slowing GDP growth in 2020-21 at the rate of 5 percent, Fitch Ratings said.
"The pandemic has drastically weakened India's growth outlook and laid bare the challenges caused by a high public-debt burden," Fitch Ratings said in its APAC Sovereign Credit Overview released on Wednesday.
"After the global crisis, India's GDP growth is likely to return to higher levels than 'BBB' category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic," it said forecasting a 9.5 percent real GDP growth in the next year 2021-22.
On 25 March, the Indian government initiated a nationwide lockdown to combat the spread of COVID-19, halting almost all economic activities. The lockdown was extended several times with some restrictions being eased in the month of May in areas with fewer infections.
"However, new cases have continued to rise," it said.
"The government has announced stimulus measures amounting to 10 percent of GDP, of which the fiscal component of about 1 percent of GDP is significantly less than many of India's peers," the rating agency said.
General government debt already stood at 70 percent of GDP in 2019-20, well above the 'BBB' rating median of 42 percent. India's ratio of public debt/GDP is expected to rise to 84 percent of GDP in 2020-21 - up from a forecast of 71 percent when Fitch Ratings affirmed the 'BBB-' rating in December 2019.
"This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming that the government's fiscal response remains restrained," it said.
"The credit profile is strengthened by relative external resilience stemming from solid foreign-reserve buffers, but weakened by some lagging structural factors, including governance indicators and GDP per capita."
Fitch Ratings added that there was greater confidence in a sustained reduction in general government debt over the medium term to a level closer to the 'BBB' peer median. Also, there is a possibility of higher sustained investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation.
However, a material increase in the fiscal deficit has caused the gross general government debt/GDP ratio to be placed on a sustained upward trajectory.
Other negative aspects were loose macroeconomic policy settings that cause a return of persistently high inflation and widening current-account deficits, which would increase the risk of external funding stress, it said.