Fitch retains negative outlook on India

Last Updated: Tue, Jan 08, 2013 19:33 hrs

The government’s liberalising of its foreign direct investment (FDI) regime and steps to control the fiscal deficit do not seem adequate for Fitch.

The rating agency has reiterated its negative’ outlook on India’s sovereign credit rating, which it gave six months earlier. The agency continues to have concerns about slowing economic growth, persistent inflationary pressures and an uncertain fiscal outlook.

The warning by Fitch comes in the backdrop of bleak balance of payments data for July-September 2012. The current account deficit for this quarter, the second of the financial year, shot up to 5.4 per cent of gross domestic product (GDP) from 3.9 per cent in Q1.

The government reiterated it was working to improve the fiscal health and to push reforms. The economic affairs secretary, Arvind Mayaram, said they were not worried about a Fitch downgrade threat and would restrict the fiscal deficit to 5.3 per cent of GDP for 2012-13.

Agreeing with Fitch’s concerns, economists said fiscal conditions remained weak and inflation at an elevated level.

Rupa Rege Nitsure, chief economist and general manager, Bank of Baroda, said after a series of reforms, there seems to be a lull. Economic conditions remain grim.

Brinda Jagirdar, head of economic research with State Bank of India, said the economic situation remains challenging and we need to be alert on developments.

Art Woo, sovereign analyst at Fitch, described the government’s fiscal and economic reforms last year as a “step in the right direction” but said the government would miss its fiscal deficit target for the year. “The negative outlook reflects Fitch’s concerns over deterioration in India’s economic and fiscal outlooks, particularly a sharp slowdown in growth, persistent inflationary pressures and weaker public finances,” he said in a conference call.

The Indian economy extended its long slump in the September quarter, growing only 5.3 per cent from a year earlier, below the 5.5 per cent expansion seen in the three months to June, keeping it on track for its worst year in a decade.

Woo called growth “a bit disappointing” at a time of elevated wholesale price inflation, despite acknowledging the signs of stabilisation in the near term for both indicators. He also expressed concern about India’s record current account deficit of 5.4 per cent in the September quarter.

Last year, both Fitch and Standard & Poor’s cut their ratings outlook for India to negative’, putting the country in danger of being the first of the BRICS’ grouping of fast-growing economies to be downgraded to “junk” status.

Fitch and S&P also affirmed a BBB- rating for the country, the lowest investment grade. Moody’s has a “stable” outlook on its comparable Baa3 rating for India.

The government has since unveiled measures such as raising of fuel prices and further opening the retail sector for foreign investment. The government is also aiming to keep, as noted, its fiscal deficit at 5.3 per cent for the year ending in March.

Fitch said it would watch the steps for fiscal consolidation in the coming Union budget for 2013-14, in the backdrop of the Kelkar panel report of October 2012.

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