Growth worries weigh on India’s sovereign rating



India’s investment grade sovereign rating could face pressure due to rising headwinds against growth as the country battles the second Covid wave, which may exacerbate the country’s high debt and fiscal stress and increase financial sector risks, global rating agencies said.

However, growth-enhancing structural reforms and addressing infrastructure gaps could bolster the rating outlook.


The country has the lowest investment grade rating with a negative outlook from all three major global agencies — S&P, Fitch and Moody’s. Another downgrade would push the rating below investment grade. “India has the highest debt ratio of Fitch-rated ‘BBB’ EM sovereigns at around 90% of GDP, and has limited fiscal headroom from a ratings perspective,” said Jeremy Zook, director, sovereign ratings, Fitch Ratings. “The rating would come under additional pressure from a worsening of the debt ratio trajectory resulting from weaker medium-term growth prospects or further widening of fiscal deficits.”

Fitch had affirmed the BBB- sovereign rating in April with a negative outlook that has been in place since June 2020. The outlook indicates the direction a rating is likely to move over a one- to two-year period.

India had the highest rating from Moody’s at the start of the pandemic. A few months into the nationwide lockdown, it downgraded India’s sovereign rating to Baa3 from Baa2 with a negative outlook in June 2020. Moody’s cited potentially deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength.

“Further evidence that self-reinforcing economic and financial risks are rising would put downward pressure on the rating,” William Foster, vice president and senior credit officer, sovereign risk group, Moody’s Investors Service, told ET. Persistent slowdown in growth, weak government finances and financial sector risks are the key challenges, according to Moody’s.

“These vulnerabilities weighed on the sovereign credit profile prior to the coronavirus pandemic and were subsequently exacerbated by the shock,” Foster said. India’s fiscal deficit rose to 9.5% of GDP in FY21 as growth slumped and revenues collapsed. It’s budgeted at 6.8% of GDP in FY22.

“The severity of the crisis is challenging the country’s fiscal settings, which were already weak before Covid struck,” S&P said last week. “The depth of the Indian economy’s deceleration will determine the impact on its sovereign credit profile.”


Rating agencies do not expect the second wave to dent growth like the first one as lockdowns remain localised and may be of a shorter duration. They expect a strong rebound once the second wave abates.

“Businesses and consumers have also grown more accustomed to operating under unusual pandemic conditions,” Foster said.

However, he warned that longer-term risks to India’s economy would increase if the second wave is prolonged beyond June and the pace of vaccinations is slow.

“At this stage, we expect negative sequential economic activity to be limited to the April to June quarter, followed by a strong rebound in the second half of the year,” Foster said.

The agency has revised its real GDP growth forecast down to 9.3% from 13.7% for the fiscal year ending March 2022 and to 7.9% from 6.2% for the following year.


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