Fitch downgrades India’s credit outlook to negative

Last Updated: Jun 18, 2012, 16:45 PM IST

New Delhi: Global rating agency Fitch on Monday downgraded India's credit outlook to negative citing corruption and lack of reforms, but the government chose to reject the observations saying they were based on old data.

Fitch's move to lower the country's credit rating to negative from stable comes less than three months after rival Standard & Poor's did a similar downgrade.

India faces an "awkward combination" of slow growth and elevated inflation as well as structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms, Fitch Ratings said in a release today.

Finance Minister Pranab rejected the Fitch revision saying it was based on "older data" as it ignored recent positive trends.

"While the markets had already anticipated that Fitch would revise the outlook and so there is no surprise in the announcement, it must be pointed out that Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy," Mukherjee said in a statement.

Chief Economic Advisor Kaushik Basu said he was not surprised by the rating action.

"There is a herd mentality among policymakers, herd mentality among corporates. There is also little bit of herding among credit rating agencies. We were pretty much expecting Fitch to do so," Basu said.

According to Fitch, the outlook revision reflects heightened risks that India's medium to long-term growth potential would 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 also downgraded the credit outlook of seven PSUs -- NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC.

Last week, S&P had warned that India may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade. This came after the agency cut the outlook to negative in April.

Director of Fitch's Asia Pacific Sovereign Ratings Group Art Woo said the agency reviews sovereign ratings around the world annually.

He said Fitch reviewed India most recently, typically, on a broad range of factors, like macro economic policy, economy, public finances.

"Negative, more precisely mean over 12-24 months there is a chance that India's rating could be downgraded," he told a TV channel.

The Finance Minister said Fitch has not taken note of many of the government's recent initiatives including fertiliser subsidy reform, capping subsidies as a fraction of GDP, new manufacturing and telecom policies.

He also pointed out that foreign institutional investors (FII) have reposed renewed faith in the Indian economy and have already invested a net USD 12.3 billion in the first five months of the current calendar year compared to USD 8.3 billion in the full calendar year of 2011.

Basu said though there is enough "clues" to say that there is some deep strength in the country, "there is lot to be done. I think that the next six months will be crucial".

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

The agency expects it to be 5.6-5.9 percent of GDP.

It has also cut the GDP growth forecast to 6.5 percent in 2012-13, down from a previous projection of 7.5 percent.

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