Global ratings agency Fitch has followed in the steps of Standard & Poor’s in revising India’s rating outlook to negative. Last week, S&P had unveiled a report strongly criticizing the government’s inability to move ahead with economic reforms and referred to cracks in the ruling coalition that were holding up progress. Disappointing news about the state of the Indian economy has hit the headlines with regularity as growth has slowed and inflation been stubbornly high, leaving the government on the back foot on its handling of the economy. The actions of Fitch and S&P raise the risk of Indian bonds slipping into the junk category, hurting the country’s image as an investment destination. The cost of overseas borrowing for Indian companies could also go up.
Fitch said 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.
Fitch has, for now, retained India’s BBB- rating, which is the lowest investment grade rating.
The agency, however, said India faced an awkward combination of slowing growth and high elevated inflation and also structural challenges surrounding its investment climate. It expects the GDP to rise 6.5% in FY13, down from a previous projection of 7.5%. It says the WPI inflation may rise by an average of 7.5% in FY 2012-13 “which, though lower than the 8.8% rise in FY 2011-12, continues to be higher and stickier than previously expected, diminishing scope for monetary policy flexibility”.
The agency expressed doubts about the government’s ability to meet the fiscal deficit target of 5.1% of gross domestic product set for 2012-13. Finance minister Mukherjee said the ratings agency had not taken note of many recent structural reforms initiatives taken by the government.