Moody's Investor Service on Thursday revised the contraction rate of India's FY21 GDP to (-) 10.6 per cent from an earlier estimate of (-) 11.5 per cent.
The revision comes days after the Centre announced new stimulus measures.
Besides, Moody's revised the forecast for the next financial year ending March 2022.
It now estimates a growth of 10.8 per cent from a rise of 10.6 per cent, which was predicted earlier.
"The latest measures (stimulus) aim to increase the competitiveness of India's manufacturing sector and create jobs, while supporting infrastructure investment, credit availability and stressed sectors," Moody's said.
"As such, they present potential upside to our current growth forecasts, a credit positive."
According to the ratings agency, consumer confidence in India remains relatively low amid a continued elevated number of daily new coronavirus cases, "although this has come down from a peak in September".
"Stronger nominal GDP growth over the medium term would make it easier for India's government to address its weak fiscal position, which the coronavirus has exacerbated; we forecast government debt to increase to 89.3 per cent of GDP in fiscal 2020 and decline to 87.5 per cent in fiscal 2021, from an already elevated 72.2 per cent in fiscal 2019," Moody's said.
"By contrast, we forecast the median for Baa-rated peers to rise to 60.8 per cent in 2020. The country's mixed track record on revenue-raising measures lowers prospects for fiscal policy-driven budget consolidation. A sustained increase in GDP growth would therefore likely be a major driver of any durable future fiscal consolidation."
Accordingly, the global ratings agency expects the general government fiscal deficit to remain wide, reaching around 12 per cent of GDP, with some upside risk, in fiscal 2020 and narrowing to about 7 per cent of GDP over the medium term, still above the deficit of 6.5 per cent of GDP in 2019.
Furthermore, the agency cited that new measures target manufacturing competitiveness.
The latest package follows the Rs 467 billion (0.2 per cent of GDP) of stimulus announced in October and close to Rs 2 trillion (1 per cent of GDP) of direct spending allocated in the government's first stimulus package in May.
The government expects that no new borrowing will be required to fund the additional spending.
Among the new measures, the government has allocated Rs 1.5 trillion to extend the Production Linked Incentive (PLI) scheme across a further 10 sectors, including automotive and advance cell chemistry manufacturers.
Under the scheme, manufacturers in key sectors will receive incentives in the form of direct payments over five years.
The scheme aims to increase the competitiveness of India's manufacturing sector, potentially reviving private investment, where year-on-year growth has been trending downward since the second quarter of 2018.
