Besides, private consumption growth more than halved to 3.1 per cent year-on-year in Q1 of FY2019/20 from 7.2 per cent year-on-year in Q4 of FY2018/19 largely due to the collapse of a dominant Non-Bank Finance Company (NBFC) in the industry, the Infrastructure Leasing & Financial Services Ltd (IL&FS), in September 2018, it added.
The IL&FS's default amid fraud allegations also caused a credit crunch for industry rivals and a subsequent surge in their borrowing costs. This saw NBFCs significantly cut back on lending activity in the months that followed which resulted in six consecutive months of year-on-year contractions in vehicle sales from March-September 2019.
NBFCs helped to fund more than 50 per cent of commercial vehicles, 30 per cent of passenger cars, and nearly 65 per cent of two-wheelers in India.
"We expect weakening merchandise imports to pressure import tariff revenues despite a hike in tariff rates charged on certain goods introduced in the FY20 Union Budget. Growth of merchandise imports has been on a slowing trajectory since Q2FY2018/19 and even went into contraction in Q2FY2019/20," Fitch said.
It also revised down expenditure growth forecast for FY20 to 12.1 per cent (from 13.7 per cent previously), below the government's 13.4 per cent projection.
"Despite the finance minister saying in September that the government has no plans to cut back on expenditures, we believe that weak revenue collection will eventually constrain the government's ability to maintain its spending targets," it said.
There are chances that the government may seek to stimulate growth through fiscal spending, given a dismal 5 per cent real GDP growth print in Q1 of FY20 versus an already weak 5.8 per cent growth rate during Q4 of FY19.
"This could see the deficit come in wider than our expectations," it said.
On the upside, the government could seek another large capital injection from the Reserve Bank of India (RBI) via its interim dividend paid in March which could see the central deficit come in smaller than the forecast.
The RBI follows a 12-month period from July to June and pays an interim and final dividend to the government based on its profits.
Stripping out the interim dividend of Rs 28,000 crore which the RBI has already paid to the government in March 2019 (which would accrue to FY19 finances), the government received Rs 67,400 crore in August 2019 from the central bank to bolster its finances for FY20.