Fitch Ratings on Tuesday warned that India’s fiscal outlook led by lower growth could pressurise country’s sovereign rating at a time when the government is likely to announce a relief package to support MSMEs and others.

“Fiscal easing to support growth is likely to be announced, given the extended lockdown. Further deterioration in the fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when it entered this crisis,” the rating agency said in a statement.

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The rating agency said its assessment of India’s rating in such a case would be guided by our judgement of its probable medium-term fiscal path in the post-crisis environment.

“The government may tighten fiscal policy again once the pandemic is under control, but India’s record of meeting fiscal targets and implementing fiscal rules has been mixed in recent years, which will colour our assessment of any official commitment to tighten fiscal policy over the medium term,” it added.

Fitch had in December 2019 reaffirmed India’s ‘BBB-‘ rating with a stable outlook, before the pandemic shocked the world. The rating agency has revised down its economic growth forecast for India to 0.8 per cent for the fiscal year ending March 2021 (FY21), reflecting the impact of the coronavirus pandemic and official efforts to contain it. This is down sharply from its forecast of 5.6 per cent prior to the outbreak.

“We expect growth to rebound to 6.7 per cent in FY22, but there is a risk that the crisis could amplify fiscal and financial sector strains and hurt the country’s growth prospects over the medium term,” Fitch added.

“The country has limited fiscal space to respond to the challenges posed by the health crisis,” said Fitch adding that “general government debt stood at 70 per cent of GDP in FY20, according to our estimate, well above the ‘BBB’ median of 42 per cent. India’s relatively robust external position supports its sovereign rating, and has helped to offset its comparatively weaker fiscal metrics,” the rating agency said.

“We now expect India’s ratio of public debt/GDP to rise to over 77 per cent of GDP in FY21 – up from a forecast of 71 per cent when we affirmed the rating in December – and to stay on an upward track in FY22,” Fitch said.

It said this estimate is based on expectation of slower economic growth in 2020-21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained.

Last week, the rating agency cut India’s growth outlook for FY21 to 0.8 per cent From previously 2 per cent, as it believed that the depth of global recession is far more severe.