Fitch warns on Indian economy; reforms need time

MUMBAI Mon Dec 3, 2012 5:33pm IST

1 of 2. Employees are seen at the Bedara Bhommanahalli (BBH) iron ore mines at Chitradurga in Karnataka November 9, 2012.

Credit: Reuters/Danish Siddiqui/Files

Related Topics

Rajalakshmi (C), 28, smiles after winning the Miss Wheelchair India beauty pageant in Mumbai November 26, 2014. REUTERS/Danish Siddiqui

Miss Wheelchair India

Seven women from across India participated in the country's second wheelchair beauty pageant, which aims to open doors for the wheelchair-bound in modelling, film and television, according to organisers  Slideshow 

MUMBAI (Reuters) - India's sovereign rating could be cut if the government loosens fiscal policy in the run-up to elections due by 2014 or sees a prolonged slowdown in economic growth, ratings agency Fitch said on Monday.

Both Fitch and Standard & Poor's earlier this year cut their ratings outlooks for Asia's third-largest economy to negative, putting the country in danger of being the first of the BRICS grouping of fast-growing economies to be downgraded to junk status.

Fitch said weak GDP data on Friday confirmed the slowdown in the economy, and recent reform proposals by the government, while potentially supportive of growth, would need time to work and face political risks in their implementation.

"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," its report said.

The Indian economy extended its long slump in the September quarter, growing only 5.3 percent, below the 5.5 percent expansion seen in the three months to June, keeping it on track for its worst year in a decade.

The ratings agency expects economic recovery to be shallow with real GDP falling to 6 percent in the current fiscal year from 6.5 percent in the previous year before recovering to 7 percent in the year that ends March 2014.

The agency, however, pointed out that the upbeat HSBC PMI reading earlier in the day suggests that growth may have troughed. India's manufacturing sector beat the expectations of economists to grow at its fastest pace in five months in November, boosted by strong export orders and a surge in output, a business survey showed on Monday.

"However, tight fiscal and monetary policy settings decrease the authorities' scope to support growth amid stubbornly high inflation and a commitment to consolidating public finances," the report said.

Fitch said several of the proposals announced by the government require legislative approval and policy reversals cannot be ruled out.

The government opened doors for foreign direct investment into sectors like multi-brand retail in mid-September but the parliament remains in deadlock, with no decisions reached since the start of the winter session on November 22.

"The approach of general elections in 2014 means there is little time to fully enact reform. These risks are reflected in the Negative Outlook," Fitch added.

Fitch also pointed out that the government's five-year road map for reducing the fiscal deficit to 3 percent of GDP by 2016-17 is a stronger statement of intent than seen in some time, but added that India's track record of delivering on fiscal policy goals has not been encouraging.

"A loosening in fiscal policy ahead of the elections could further weaken India's public finances and put pressure on the ratings," it said.

(Reporting by Swati Bhat; Editing by Kim Coghill)

FILED UNDER:

SAARC Summit

REUTERS SHOWCASE

E-Commerce Boom

E-Commerce Boom

Online grocers come up trumps in India's e-commerce boom   Full Article 

Reuters Poll

Reuters Poll

GDP growth to slow to 5.1 pct, but no rate cut yet  Full Article 

Oil Prices Fall

Oil Prices Fall

Oil at four-year low as OPEC production cut looks unlikely  Full Article 

Hughes Dies

Hughes Dies

Australia batsman Hughes passes away aged 25  Full Article 

Google in Europe

Google in Europe

Insight - Behind Google's Europe woes, American accents  Full Article 

India-focused Funds

India-focused Funds

India-focused hedge funds up over 40 pct YTD - HFR  Full Article 

Trade Deal

Trade Deal

WTO postpones trade deal by a day after last-minute objection.  Full Article 

Land Disputes

Land Disputes

Disputes over land for industry on the rise in India, angering locals - charities  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage