After Standard & Poor’s, another rating agency Fitch has warned of a potential ratings downgrade on India’s sovereign debt.
India’s current sovereign rating of ‘BBB-’ is the last investment grade. The downgrade can take it to ‘BB+’ which is considered as junk grade. If it happens, then not only will investment inflow be hit, but overseas borrowings will also become costlier.
The agency, on June 18, had cautioned that there was a ‘one-in-two’ chance of a ratings downgrade.
In a statement issued on Monday, it said, “Policy slippage and/or mounting evidence of a structural decline in the trend growth rate, such as protracted relatively weak economic data, could cause the ratings to be downgraded.”
A loosening in fiscal policy ahead of the elections could further weaken India’s public finances and put pressure on the ratings, it added.
Referring to India’s economic growth, Fitch said, “We expect the economic recovery to be shallow. We forecast real GDP growth to fall to six per cent in FY13 (year to March 2013) from 6.5 per cent in FY12 before recovering to 7.0 per cent in FY14 (2013-14). This compares with an 8.4 per cent rise in FY11.”
The agency had earlier pegged GDP growth for the ongoing financial year at 6.5 per cent.
The agency noted that there has been evidence of slowing growth since 2012, and has been consistent with a cyclical slowdown. However, India also appears to be facing structural challenges to its investment climate.
“As we said in June when we revised our Outlook on its ‘BBB-’ rating to Negative, India's medium-to- long-term growth potential could gradually fall if further structural reforms that would improve the operating environment for business and private investment are not speeded up,” it said.
The positives
The agency highlighted issues such as opening or increase in foreign direct investment (FDI) limit in various sectors such as retail and power, reduction in LPG subsidy and proposal to set up a National Investment Board as positives.
“But political and implementation risk remains considerable. Several proposals still require legislative approval, and policy reversals cannot be ruled out. The approach of general elections in 2014 mean there is little time to fully enact reform. These risks are reflected in the negative outlook,” it explained.
The agency termed the Finance Minister’s five-year roadmap for reducing fiscal deficit to three per cent 2016-2017 as ‘stronger statement of intent than seen for some time.’
However, it feels India’s track record of delivering on fiscal policy goals is not encouraging. It has gone off track before with similar plans, such as that under the Fiscal Responsibility and Budget Management Act of 2003 and in the Thirteenth Finance Commission report of 2010, it added.
shishir.sinha@thehindu.co.in