Fitch warns India of downgrade on fiscal, growth slippages

"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," Fitch said.

Updated: Dec 03, 2012, 18:43 PM IST

New Delhi: Fiscal slippages in the run-up to 2014 general elections and declining growth could result in India's rating downgraded to below the investment level, global agency Fitch warned Monday, pegging GDP growth for the current financial year to 6 percent.

"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," Fitch said in a statement.

A loosening in fiscal policy in view of 2014 general elections, it added, "could further weaken India's public fiances and put pressure on ratings".

According to the credit rating agency, recent reform proposals, while potentially growth-supportive, need time to work and face political risks to their implementation.

"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 said.

Fitch said however that an improved investment climate which supports greater infrastructure investment, and a sharp sustained decline in inflation, would support the current 'BBB -' rating, which is a notch above the investment grade.

Referring to India's economic growth, Fitch said, "We expect the economic recovery to be shallow. We forecast real GDP growth to fall to 6 percent in FY13 (year to March 2013) from 6.5 percent in FY12..." it said.

The agency had earlier pegged the GDP for the ongoing financial year at 6.5 percent.

India's GDP growth slumped to 5.3 percent in the second quarter of the current fiscal, from 6.7 percent year-on-year.

Fitch, which lowered India's credit rating outlook to negative from stable in June, had in the following month said that the possibility of downgrading the country's sovereign rating is more than 50 percent in the next 12-24 months.

The Fitch statement today has come days after Moody's said that rating outlook of India is stable due to its strong economic growth along with high savings and investment rates.

Fitch further said that the government has also demonstrated a desire to speed up fiscal consolidation. In October, Finance Minister P Chidambaram had outlined a five- year roadmap aimed at reducing the central government fiscal deficit to 3 percent of GDP by 2016-2017.

"This is a stronger statement of intent than seen for some time. Again, however, 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 or in the Thirteenth Finance Commission report of 2010," the rating agency said.

Talking about economic growth, it said that "evidence of slowing growth has been accumulating in 2012," and has been consistent with a cyclical slowdown.

However, India also appears to be facing structural challenges to its investment climate.

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, Fitch added.

The statement also said that tight fiscal and monetary policy settings decrease the authorities' scope to support growth amid stubbornly high inflation and a commitment to consolidating public finances.