Tensions with China may impact India's medium term outlook: Fitch Ratings

Days after lowering the outlook on India's sovereign rating to negative, Fitch on Monday said that escalating tensions with China may impact the country's medium term outlook. In a webinar on Monday, Fitch Ratings Director (Sovereign Ratings) Thomas Rookmaaker said that the recent tensions between New Delhi and Beijing arising out of the border issue may not have immediate effect on India's credit profile, but it could distract the government from executing the announced policy reforms and impact medium-term outlook.

"The most recent situation at the border with China doesn't impact the credit profile immediately. But the question is to what extent will the government be distracted by these kinds of developments in terms of delivering reforms," the Economic Times quoted Rookmaaker as saying.

On June 18, Fitch Ratings revised its outlook for India to negative from stable, citing increased risk to the country's growth due to coronavirus pandemic and challenges associated with a high public-debt burden. The agency has projected India's economic activity to contract by 5 per cent in the fiscal year ending March 2021 (FY21) due to the strict lockdown measures imposed by the government to contain the spread of virus. It expects growth to rebound, to 9.5 per cent next year, mainly due to low base.

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The agency expects the potential GDP growth rate of India in the medium term to be a "little bit" lower than the previous estimate of 6.5-7 per cent, impacted by new asset-quality challenges in banks as well as liquidity issues in NBFCs.

Rookmaaker further stated that India may announce another round of fiscal stimulus package, worth about 1 per cent of GDP in the coming months. The COVID-19 pandemic is still in India and it is "very likely" that the government will have to spend a bit more on fiscal measures to support the economy, he said.

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"In our forecast we have factored in a larger stimulus package, not just 1 per cent of GDP of fiscal measures that have been announced so far. You may recall that Prime Minister Narendra Modi announced 10 per cent of GDP as measures, but 9 percentage points were non-fiscal in nature. There was also an announcement of bond issuance, borrowing requirement of government and that was 2 percentage points of GDP," Rookmaaker said while addressing the Fitch Ratings webinar.

"That could give an indication that another 1 percentage points could come in the months ahead to provide relief for those who need it," he added.

By Chitranjan Kumar with PTI inputs