Rohini Malkani, Senior Vice President, Global Sovereign Ratings, DBRS Morningstar, New York
Covid-19 continues to present a very challenging backdrop for global sovereign ratings. Sovereigns have already incurred substantial costs from the pandemic in terms of health crisis management, lost output, lower fiscal revenues and higher expenditures. While the stimulus provided to workers and businesses has helped lay a stronger foundation for an economic recovery, the outlook remains uncertain as evolution of the virus: additional outbreaks or delays in vaccine distribution could dampen the recovery.
India is no exception. Although the increased expenditure will speed an economic recovery and some may be directed toward productive investment, the global shock brought on by COVID-19 will continue to weigh on key credit metrics. The high fiscal deficit combined with the contraction in FY21 growth have led to an increase in public sector borrowings. For now, low real interest rates mitigate against this risk, but past crises have taught us that a rise in inflation or in risk premia could yet occur. In addition to risks of virus mutations, the outlook is still highly uncertain with economic prospects in part constrained by economic scarring from the COVID-19 shock and legacy issues in the financial sector.
Nonetheless, DBRS Morningstar expects the recent budgetary measures to be positive for the recovery and medium-term growth, but effective and timely implementation will be key for sustaining the nascent economic revival currently underway. The plan is positive, but execution is key.
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