Global ratings agency Fitch expects that the Centre’s reform agenda in response to the coronavirus pandemic shock has the potential to raise India’s medium-term growth rate.
Nevertheless, the agency pointed out, there are also downside pressures to growth and that it will take time to assess “whether the reforms are implemented effectively”.
“In recent years, the Indian authorities’ strategy to keep the public debt ratio and broader public finances under control has relied heavily on expectations of sustained and rapid nominal GDP growth,” the ratings agency said.
“The pandemic will slow the medium-term growth, as we believe that damaged corporate balance sheets will dampen investment for years. Renewed asset-quality challenges in banks and generally fragile liquidity for non-bank financial companies could also constrain growth prospects and jeopardise the stability of the medium-term government debt or GDP trajectory.”
Accordingly, it said, raising medium-term growth rates under these circumstances will require reforms to support investment and boost productivity.
“We noted the GDP growth outlook as a key rating sensitivity when we revised the Outlook on India’s ‘BBB-‘ rating to ‘Negative’ from ‘Stable’ in June,” Fitch Ratings said.
“Several reforms passed by Parliament since the pandemic set in could lift medium-term growth prospects. The most notable are agricultural reforms to give farmers more flexibility over where to sell their produce.”