Fitch downgrades India's rating to 'negative'
Chennai, June 18 (IANS) Credit rating agency Fitch Ratings Monday revised downward India's outlook to "negative" from "stable" owing to corruption and inadequate reforms.
It, however, affirmed the country's long term foreign and local currency issuer default ratings (IDR) at "BBB-".
"India faces an awkward combination of slowing growth and still-elevated inflation. Real GDP (gross domestic product) grew just 6.5 percent yoy (year-on-year) in FY2011-12 (end-March 2012), down from an 8.4 percent rise in FY 2010-11," Fitch said in a statement.
"India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms," it said.
According to Fitch, 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.
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, Fitch said.
"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," said Art Woo, director in Fitch's Asia-Pacific Sovereign Ratings group.
Fitch forecast real GDP to rise 6.5 percent yoy in FY13, down from a previous projection of 7.5 percent. Headline wholesale price index (WPI) rose 7.6 percent yoy in May 2012, up from 7.2 percent yoy in April.
Fitch is projecting WPI to rise by an average of 7.5 percent in FY2012-13 which, though lower than the 8.8 percent rise in FY2011-12, continues to be higher and stickier than Fitch previously expected, diminishing scope for monetary policy flexibility.
India's public finances are a key rating weakness compared with other "BBB"-rated sovereigns, which constrains scope for fiscal policy flexibility.
Noting the government has repeatedly delayed reforms to the tax and subsidy systems, Fitch said that the confluence of weaker economic growth and a large subsidy bill means India will likely miss its 5.1 percent of GDP deficit target for FY2012-13. Fitch expects it to be 5.6 percent-5.9 percent of GDP.
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, it added.
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