New Delhi: Fitch Ratings on Monday revised India’s credit outlook to negative from stable, blaming rising risks to its growth potential and limited progress on fiscal consolidation adding to macroeconomic woes. The action follows that of Standard and Poor’s (S&P), which lowered the country’s sovereign credit outlook to negative in April.
The agency warned that any significant loosening of fiscal policy that leads to an increase in the gross general government debt/gross domestic product (GDP) ratio would result in a downgrade of India’s sovereign ratings. “In addition, a material downward revision of Fitch’s assessment of the India’s medium-term growth potential along with persistent high inflationary pressure would hurt India’s sovereign creditworthiness,” it said.
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Ratings agency Fitch has downgraded its outlook for India’s economy. Mint’s Asit Ranjan Mishra looks at the impact of the move.
Earlier this month, S&P warned in a report that India could be the first among the so-called Bric nations to have its investment-grade rating lowered to junk status due to slower growth, ballooning deficits and political roadblocks to economic policymaking.
Finance minister Pranab Mukherjee said the move didn’t come as a surprise and that the markets had already anticipated that Fitch would revise the outlook. But Fitch had relied primarily on older data and ignored recent positive trends in the Indian economy, he added.
“The concerns expressed by Fitch on the economic growth potential, inflationary pressures and weak public finances are based on earlier data. Government has already taken note of such concerns,” he said.
Kaushik Basu, chief economic adviser in the finance ministry, was more critical of the outlook revision. The “herd mentality” of ratings agencies led to Fitch’s revision, he said.
“There is a lot to be done and the next six months will be crucial,” Basu said, addressing journalists at the Foreign Correspondents’ Club in New Delhi. “The whole statement of Fitch is a pretty positive statement,” he added.
Fitch said the outlook revision reflects heightened risks that India’s medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments. “The negative outlook also reflects India’s limited progress on fiscal consolidation and, in particular, on reducing the central government deficit despite improvement in the financial health of state governments,” it said.
India is targeting a fiscal deficit of 5.1% of GDP for this fiscal year. But a higher subsidy bill and lower tax revenue have resulted in its fiscal projections for 2011-12 going awry. India’s fiscal deficit was 5.8% in 2011-12, wider than the initial target of 4.6%. India’s current account deficit has also been widening on account of high fuel prices and a large gold import bill, and is expected to be around 4% of GDP in 2011-12.
Fitch pointed out that India faces an awkward combination of slowing growth and still-elevated inflation. While India’s growth slowed to a nine-year low of 5.3% in the fourth quarter of the 2011-12 fiscal year, wholesale price inflation accelerated to 7.55% in May while retail level inflation has been above the double-digit mark in April and May.
Fitch has also reduced its growth forecast for India to 6.5% in 2012-13, down from a previous projection of 7.5%. It also held that India faces structural challenges related to the investment climate in the form of corruption and inadequate economic reforms.
“Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Art Woo, director at Fitch’s Asia-Pacific Sovereign Ratings group, said in a release.
Besieged by corruption scandals, hamstrung by infighting, and under pressure from coalition partners and opposition parties, the government has put on hold reforms such as allowing foreign investment in multi-brand retail. Less politically sensitive measures such as allowing foreign airlines to buy stakes in domestic carriers have also not seen any progress. Key economic legislation such as the Direct Taxes Code and the goods and services tax are also on hold. The government has also not been able to raise diesel and cooking gas prices for a year.
The government needs to do more to improve investor sentiment, industry said.
“There have been indicators in the last two years that the economic growth could get impacted and ratings could change,” said Harsh Mariwala, chairman and managing director of Marico Ltd. “But the government is not in a mood to take critique positively and is handling everything as criticism. There is a difference between the two. There is a need for the mood to improve within India and of India overseas. Until that doesn’t happen, FII (foreign institutional investor) inflows, capital investments will get impacted.”
V. Srinivasan, group chief executive officer and director of conglomerate Siva Group, said the Fitch downgrade was a wake-up call. “We really need leadership and that is what is lacking. We are getting into a downward spin and it is horrible.”
K. Srinivasan, managing director of Chennai-based Industrial chemical maker Carborundum Universal Ltd, a part of the $3.8 billion Murugappa Group, said, “We have to accept this as a new normal. This is where things are going to be for the next two years.”
Sudipto Mundle, professor emeritus at National Institute of Public Finance and Policy, believes the economy is bottoming out and sees an early pick-up. Mundle said he was optimistic because he expects a normal monsoon and Europe taking a positive turn with Germans becoming “a little more reasonable”. Mundle also expects economic reforms to pick up slowly along with invester sentiment because of “the reduced clout of Trinamool Congress chief Mamata Banerjee over the government”.
Sapna Agarwal and Leslie D’Monte in Mumbai, Anupama Chandrasekaran in Chennai and Reuters contributed to this story.
asit.m@livemint.com
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