Fitch lowers India's credit rating outlook to negative

 Another global rating agency Fitch today lowered India's credit rating outlook to negative, citing corruption, inadequate reforms, high inflation and slow growth as reasons for the revision.

India faces an "awkward combination" of slow growth and elevated inflation, Fitch said, adding the country "also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms".

Standard and Poor's (S&P) had in April lowered India's rating outlook to negative from stable. It also warned on June 11 that the country may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade.

"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," Fitch said.

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. 

The economic growth of India fell to nine-year low of 5.3 per cent for the three months ended March 2012, while the overall growth for 2011-12 stood at 6.5 per cent.

The fiscal deficit climbed to 5.9 per cent of GDP in 2011-12, against a target of 4.6 per cent, largely reflecting an overshoot in subsidy spending.

For the current fiscal, the government has pegged fiscal deficit at 5.1 per cent of GDP against 5.9 per cent in the last fiscal.

The government has repeatedly delayed reforms to the tax and subsidy systems, it said, adding, the confluence of weaker economic growth and a large subsidy bill means India will likely miss its 5.1 per cent of deficit target for 2012-13.

The agency expects it to be 5.6-5.9 per cent of GDP.Fitch has also cut the GDP growth forecast to 6.5 per cent in 2012-13, down from a previous projection of 7.5 per cent.

Headline wholesale price index (WPI) rose 7.6 per cent in May from 7.2 per cent in April.The rating agency projected WPI to rise by an average of 7.5 per cent in the current fiscal which, though lower than the 8.8 per cent rise in 2011-12, continues to be higher and stickier than previously expected, diminishing scope for monetary policy flexibility.

"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," it said.

Fitch, however, has retained the India's sovereign rating at 'BBB-', a notch above the speculative grade. 

The rating sovereign affirmation reflects India's diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding.

The government is able to issue long-term debt at a low cost in its own currency, Fitch said, adding, net external debt is very low and still high foreign exchange reserves of the RBI provide a cushion against potential external shocks.

The underlying drivers of the last decade of rapid economic growth remain in place -- a fast growing pool of educated workers and an innovative private services sector, it added.

However, it said, a significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India's sovereign ratings.

In addition, a material downward revision of the assessment of the country's medium-term growth potential along with persistent high inflationary pressure would hurt India's sovereign creditworthiness, it said.

"Conversely, an improvement in country's investment climate, which supports greater infrastructure investment and a sharp sustained decline in inflation, would be supportive for the country's sovereign ratings. Fiscal consolidation and structural budget reform would also support the ratings," it added.

It observed that the general elections due in early 2014 could see politically driven pressure to loosen fiscal policy, which could further weaken India's public finances relative to peers.

Praising India's external financial position as a rating strength, it said, foreign exchange reserves is eroding and has fallen 11 per cent since August 2011.

Reserves remained at USD 286 billion as of end-May 2012, equal to six months of current external payments, which still provides the sovereign with an important buffer during periods of elevated global risk aversion.

Slowing growth should curb the current account deficit and slow the weakening of the external finances, although oil prices pose a risk, it said, adding, prolonged and intensified pressure on the currency and/or foreign reserves would be negative for the credit profile.