Fitch Ratings on Monday said the ongoing border tensions with China does not immediately impact India's credit profile, but may distract the government from implementing reforms.
Fitch Ratings Director (Sovereign Ratings) Thomas Rookmaaker said the government has announced reforms to improve growth going forward and a strong GDP growth is important to cut down public debt.
"The announcement of reforms could lift growth in medium term and that's where geo-politics comes in. The recent situation at the border with China, may be, does not impact the credit profile immediately, but the question is to what extent will the government be distracted by these kind of developments in delivering reforms," Rookmaaker said at Fitch Ratings webinar.
Last week, 20 Indian army personnel, including a Colonel, were killed in a violent confrontation with Chinese troops in the Galwan Valley in eastern Ladakh, which has seen increased border tensions between the two countries.
Fitch, last week, lowered India's sovereign rating outlook to 'negative' from 'stable', citing weakening growth outlook following COVID-19 outbreak, but retained the lowest investment grade rating of 'BBB-'.
Rookmaaker said reforms in areas like agriculture supply chain could help lower food prices and bring down inflation, while the intention to privatise state-owned enterprises could be transformative.
Such structural reforms could be supportive of growth in the medium term.
"It is interesting that Indian authorities have announced structural reforms to improve growth going forward. Strong GDP growth in medium term is particularly important to achieve the downward trajectory of India's government debt after the pandemic recedes," Rookmaaker said.
He projected government debt to rise to 84.5 per cent of GDP from 71 per cent in fiscal 2019-20, and general government fiscal deficit to rise to 11.5 per cent.
The medium term growth could be affected by renewed asset quality challenges in banks and liquidity issues in NBFCs, he said.
"The question going forward is how much the financial sector will be impacted by pandemic and whether it is able to facilitate credit growth and enhance GDP growth in medium term," Rookmaaker said.
Fitch expects economic activity to contract by 5 per cent in the fiscal year ending March 2021 (FY21) due to the strict lockdown imposed by the country to control spread of coronavirus, before rebounding by 9.5 per cent in 2021-22.
It further said there are "considerable risks" to growth projections as coronavirus cases are going up in India.
Rookmaaker said whether India would be able to sustain a growth rate of 6-7 per cent would depend on the impact of pandemic, particularly on financial sector.
The international rating 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.
"The medium term growth outlook will come down a little bit. But it is too early to say by how much. We will know more by the situation in financial sector, when the moratorium (on loan repayment) gets lifted, where the financial sector basically is after the pandemic," he said.
Fitch said a structurally weaker real GDP growth outlook, for instance due to continued financial sector weakness or lacking reform implementation, could lead to a sovereign rating downgrade.
On the other hand, implementation of a credible strategy to reduce government debt after the pandemic, and higher sustained investment and growth rate and a healthier financial sector would lead to a rating upgrade.
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