New Delhi: Fitch Ratings has exuded confidence that the Indian economy will bounce back from the prevailing contraction and slowdown largely on the back of the COVID-19 pandemic and projected India's GDP to grow at a healthy rate in the next fiscal year. The credit ratings agency has projected India's GDP to grow at 9.5 per cent in FY 2021-22 after a contraction of 5 per cent this fiscal year.

“The pandemic has drastically weakened India’s growth outlook and laid bare the challenges caused by a high public-debt burden. After the global crisis, India’s GDP growth is likely to return to higher levels than 'BBB' category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic,” Fitch Ratings said in the its APAC Sovereign Credit Overview released on Wednesday.

The global ratings agency noted that the country’s credit profile has been boosted by relative external resilience stemming from solid foreign-reserve buffers, but weakened by some lagging structural factors, including governance indicators and GDP per capita.

In December last year, Fitch had affirmed India’s sovereign ratings. While affirming the ratings, the agency backed its rationale on the fact that there is a reduction in general government debt over the medium-term closer to the ‘BBB’ peer median as well as higher investment and growth rates without the creation of macroeconomic imbalances.

The agency listed a significant rise in the fiscal deficit, which could lead to higher gross general government debt to GDP ratio, and loose macroeconomic policy settings that cause a return of persistently high inflation and widening current-account deficits as negatives for the economy.

“General government debt already stood at 70 per cent of GDP in 2019-20, according to our estimate, well above the ‘BBB’ median of 42 per cent,” Fitch said, adding that it expects India’s ratio of public debt to GDP to rise to 84 per cent of GDP in the current fiscal.

“This is based on our expectation of slower economic growth in 2020-21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” it said. The stimulus measures by the government amount to 10 per cent of GDP, of which the fiscal component is about 1 per cent of GDP. This is significantly less than many of India’s peers, Fitch further said.