Fitch revises India GDP forecast for FY21 to -10.5% from -5% earlier

 Fitch has sharply lowered its forecast for India’s gross domestic product (GDP) growth for the current fiscal 2020-21 (FY21) and now expects the country’s GDP to contract 10.5 per cent versus its earlier estimate of 5 per cent contraction in this period. This, at a time, when the rating agency has revised upwards, albeit modestly, its forecast for global GDP – from the earlier estimated fall of 4.6 per cent to 4.4 per cent now.

The downward revision in India's forecast for FY21 comes on the heels of a sharp contraction in Indian economy in the April – June 2020 period, when the GDP came in at a negative to 23.9 per cent year-on-year (YoY) - the worst performance in nearly four decades.

“The severe fall in activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers. Furthermore, high inflation has added strains to household income,” Fitch said.

That said, the rating agency expects GDP in India to rebound strongly in the third quarter of calendar year 2020 (Q3-20) as the economy re-opens. However, it cautions that the recovery has been sluggish and uneven.

“The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3-20. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending,” Fitch said.

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As coronavirus cases rise and force some states and union territories to re-tighten restrictions, the continued spread of the virus and the imposition of sporadic shutdowns across the country has depressed sentiment and disrupted economic activity. “Supply-chain disruptions and excise duties increases have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, an easing in supply-chain disruptions and a good monsoon,” Fitch said.

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Besides Fitch, the fall in Q1FY21 GDP has seen most forecasters cut India's economic growth projection for calendar year 2020 (CY20) and FY21. Those at Nomura, for instance, has slashed GDP growth projection to -9.0 per cent YoY in 2020 (versus -5 per cent previously) and -10.8 per cent in FY21 (versus -6.1 per cent earlier).

Pranjul Bhandari, chief India economist at HSBC, too, expects growth to remain negative until December 2020, before turning slightly positive in early 2021 (that too led largely by a weak statistical base). “Despite our forecast for a positive 7.2 per cent GDP growth next year, GDP is only likely to return to pre-pandemic levels in early 2022,” Bhandari believes.

Global view

Fitch expects global GDP to fall by 4.4 per cent in 2020, a modest upward revision from the 4.6 per cent decline expected earlier. The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated, Fitch said, but they expect the pace of expansion to moderate soon.

“China has already regained its pre-virus level of GDP and retail sales in the US, France and the UK now exceed February levels, but we doubt this will become the much-lauded V-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to directly constrain private-sector spending”, said Brian Coulton, chief economist, Fitch Ratings.

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Fitch now expects the US economy to contract by 4.6 per cent this year compared to a fall of 5.6 per cent earlier. Their China growth forecast for 2020 now stands at +2.7 per cent compared to +1.2 per cent in June.

“These revisions have been partly offset by cuts to our 2020 GDP forecasts for the Eurozone to -9.0 per cent (-8.0 per cent), the UK to -11.5 per cent (-9.0 per cent) and for emerging markets (EM) excluding China to -5.7 per cent (-4.7 per cent),” Fitch said.

Fitch revises India's rating: A third view which is different yet again?

Credit rating agencies across the world have tended to converge in views, though they may not actually give the same rating. In India’s case, Fitch had retained the rating at BBB- but changed the outlook to negative from stable, while Moody’s had downgraded India and Standard & Poor’s (S&P) retained the rating. However, the commentary of all the rating agencies are similar and this is where one can look at what Fitch has got to say.
Fitch has used the pandemic impact to comment on lower growth for India, which can be -5 per cent this year due to the lockdown and its effects. This is different from Moody’s that had taken the view that growth has not been impressive even before the pandemic came.

Second, Fitch has actually blown hot and cold over the fiscal. It acknowledges that the government has been prudent when it comes to spending during these times and has limited its expenditure relief. Most of it is in the form of using the financial sector and the stimulus of 10 per cent is outside the system. This said, it goes on to say that debt will be elevated to 84.5 per cent of gross domestic product (GDP) due to the fiscal slippages. Quite clearly, the link from lower GDP growth has been extrapolated, where it is assumed that revenue will fall leading to higher borrowings (which has already been announced by the government). However, the commentary again does give a pat by saying that the debt is in rupees and even the FPI holdings are quite low to really cause a disruption.
The third concern is on the financial sector, which is of course well known today. With all the moratorium being given to the borrowers and the extensions being the corollary, the future of the quality of the assets of the banks and non-bank finance companies (NBFCs) is uncertain. Fitch acknowledges that the non-performing asset (NPA) situation has improved in financial year 2019-20 (FY20) over the last two years, but there is a good chance of stress building up again with likely defaults.
All three concerns are legitimate and the rating agency has used the benchmarks with other countries in the same bracket of BBB to take a view on the rating and outlook. While it is the prerogative of a rating agency to give its view as it based on an objective criterion, the broader issue which is raised is whether such a change would be invoked for all countries as almost all major economies affected by the pandemic have been afflicted by low growth, distorted government balances and weaker financial systems.
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Fitch has also included in the commentary a little bit on the political issues at the order with China, which is a kind of red flag raised. It has been appreciative of the Reserve Bank of India’s (RBI) policy of inflation targeting and proactive reaction to the pandemic. It is also positive about the structural reforms of the government announced over the last month or so. Clearly, India seems to be in the right direction, though further slippage can question the existing rating which is what the outlook signifies.
India has had this constant ideological battle with the rating agencies which have kept the country at just about the investment grade level. While the government is not affected by the rating, Indian companies are as is the reputation in general. Given the outline provided by the rating agency, it can be seen that almost all the factors are external to the government and hence take time to address. The government, on its part, is committed to reforms as seen in the last year or so, and would continue along the path. It is unlikely to change stance under these circumstances.

Challenges galore for financial institutions amid liquidity crunch: Fitch

With deceleration in growth and tight liquidity conditions, the country's financial institution sector may continue to face challenging operating environment, according to a report by FitchRatings.
It said the stress in non-banking financial companies, small and medium enterprises (SMEs) and the real estate sector will continue to put asset-quality pressures on financial institutions in the country.

"The Indian financial institutions (FIs) sector will continue to face a difficult operating environment amid the macroeconomic slowdown and weak funding conditions," the rating agency said in a note on Wednesday.
The rating agency expects the real GDP growth to slow to 4.6 per cent in 2019-20 from 6.8 per cent in 2018-19, led by a squeeze in credit availability from non-banking financial institutions (NBFIs) and deterioration in business and consumer confidence.
However, the real GDP growth may rebound to 5.6 per cent in 2020-21, it said.
The report said asset-quality tensions are likely to intensify if stresses on non-banks, real estate and SMEs remain unresolved.
Idiosyncratic stress in the telecom sector has also pushed up asset-quality risks for banks, which are vulnerable due to weak capital and income buffers, it said.
"The potential for contagion for banks, thus, exists as a result of their direct exposure to NBFIs as well as the second-order economic impact of being exposed to the sectors that are adjusting to the credit squeeze as the NBFIs cut back exposure," the rating agency said.
The banking system's average impaired loans ratio had fallen to 9.3 per cent by 2018-19 from 11.6 per cent at 2017-18, the first decline since 2020-11.
According to the latest Financial Stability Report released by the RBI, the gross non-performing loans of banks may increase to 9.9 per cent by September 2020 from 9.3 per cent in March 2019.
The rating agency said the recent fundraising trends by a few NBFCs in January and February 2020 indicate improvement in funding environment.
The rating agency expects NBFIs to continue to tap the offshore market, but access is likely to remain uneven and limited largely to retail-focused NBFIs and those backed by large corporate groups. Wholesale and housing finance companies are the most at risk as they will continue to find it difficult to raise funds, given their greater exposure to the real-estate sector where there is pressure on cash flows and collateral values.

Fitch cuts India's GDP growth to 4.6% as credit crunch cripples economy

FitchRatings on Friday cut India’s economic growth forecast to 4.6 per cent from its earlier projection of 5.6 per cent for the financial year 2019-20 (FY20) as credit squeeze and deterioration in business and consumer confidence over the past few quarters hurt growth.
The move includes the expectation of moderate slippage in the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) in FY20, it said in a statement.

Fitch, however, retained India’s sovereign rating at the lowest investment grade of ‘BBB-’ and outlook at stable.
The rating agency expected the Reserve Bank of India (RBI) to cut policy rate by another 65 basis points (bps) in 2020 as uptick in the consumer price index (CPI)-based inflation rate to 5.5 per cent in November appears to reflect a temporary spike in food inflation.
It said pressure on core inflation, which remained stable at 3.5 per cent, seems limited in the current environment. The RBI has cut the rate by 135 bps cumulatively since February this year, but refrained from any reduction in its December policy review because of hardening food inflation.
Fitch said banks have thin buffers to deal with continued stress in the non-banking financial companies (NBFC) sector. Banks exposure has already reached 7.4 per cent in FY19.
It estimated that banks are $7 billion short of the capital required to meet 10 per cent weighted-average common equity tier 1 ratio by FY21 — the level that would give them an adequate buffer above regulatory minimum.
The rating agency attributed its move has factored in the economy balancing a strong medium-term growth outlook and solid foreign-reserve buffers with high public debt, a weak financial sector and some lagging structural factors, including governance indicators and GDP per capita.
Fitch said the measures announced to support NBFCs have not fully arrested liquidity crunch and hoped that the Modi government 2.0 is likely to focus on reforms.
Fitch’s growth forecast is lower than what the economy clocked in the first half at 4.6 per cent, meaning the expectation is that the economy may slow further in the second half of the current financial year. The projection is lower than what Moody’s Investors Service estimated, at 4.9 per cent. Fitch is also more pessimistic than the RBI which predicted the economy to grow by 5 per cent in FY20.
“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 NBFCs and deterioration in business and consumer confidence,” Fitch said.
It expected the growth to gradually recover to 5.6 per cent in FY21 and 6.5 per cent in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term.
The positive impact of the reforms recently undertaken 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.
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, it said.
“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 Centre’s fiscal deficit crossed the entire year’s target by 2.4 per cent by October itself against 3.9 per cent a year ago.
Fitch also said the government has indicated that its corporation tax rate cut could lower revenue by 0.7 per cent of GDP in 2019-20 and it hoped to finance spending by more aggressive asset divestment, 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 per cent of GDP in FY20 and a general government fiscal deficit (the Centre and states combined) of 7.5 per cent of GDP.
“We consider it highly unlikely that the government will comply with the general government debt ceiling of 60 per cent of GDP by March 2025, as stipulated in the Fiscal Responsibility and Budget Management Act.”
India, it said, has been less affected so far by global trade tensions than many of its peers — because of the comparatively closed nature of its economy, which is not part of the Asian supply chain, and lower export commodity dependence. The government’s decision to raise trade tariffs on a number of products to curb imports has also helped, it said.