Fitch cuts India's rating, Pranab says 'based on old data'

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SME Times News Bureau | 19 Jun, 2012
Fitch Ratings Monday downgraded India's economic outlook to negative from stable, saying the country's growth outlook could deteriorate if policy-making and governance do not improve.

The rating agency affirmed the economy's long-term foreign and local currency issuer default ratings (IDRs) at 'BBB-', the lowest investment grade.

Fitch said the outlook revision reflected heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms were not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.

"India faces an awkward combination of slowing growth and still-elevated inflation. India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms," Fitch said in a statement.

The "negative" outlook also reflected 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, it said.

In response, Finance Minister Pranab Mukherjee said Fitch had not taken note of recent structural reforms in the economy, including the strengthening of public finances.

"The concerns expressed by Fitch on the economic growth potential, inflationary pressures, and weak public finances are based on earlier data. The Government has already taken note of such concerns," Mukherjee said in a statement.

Fitch's assessment came a week after Standard & Poor's said India could become the first of the BRIC economies to lose its investment-grade status, citing slowing GDP growth and political roadblocks to economic policymaking as some of the factors that could lead to such an action.

Chief Economic Adviser Kaushik Basu saw a "herd mentality" of ratings agencies that was behind Fitch's revision of India's rating outlook.

He, however, found the whole statement of Fitch "pretty positive". "There is a lot to be done and the next six months will be crucial," Basu said, addressing journalists at the Foreign Correspondents' Club in New Delhi.

In its statement, Fitch mentioned various positive factors about the economy, such as India's strong credit fundamentals, diversified economy, high domestic savings, very low net external debt, high foreign exchange reserves, a fast growing pool of educated workers and innovative private service sector.

"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 environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, a director at Fitch in a statement.

The rating agency forecast a GDP growth of 6.5 percent in the current fiscal, down from a previous projection of 7.5 percent.

Headline inflation will be at an average of 7.5 percent in 2012-13 which though being lower than the 8.8 percent rise in 2011-12, is higher that what Fitch had previously expected. This, the rating agency said, diminishes scope for monetary policy flexibility.