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

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
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.

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.
Madan Sabnavis is chief economist at CARE Ratings. Views are his own.

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