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Fitch warns India of negative credit rating
Publication Date : 09-01-2013
Contradicting the latest reports by Goldman Sachs and Moody's on India's economic recovery, global agency Fitch yesterday discounted chances of fiscal consolidation as it warned the country that the sovereign credit-rating may be "negative" for the next 12 to 24 months affirming there will be no change in its prediction in the near future.
In a similar bleak outlook Standard and Poor's said for want of proper economic measures the sovereign rating would be lowered to "junk".
Both these agencies fear the country may not meet its fiscal target of 5.1 per cent of the GDP for the current year." High fiscal deficit and heavy debt burden remain the most significant rating constraints, " Fitch said yesterday.
Analyst Art Woo has been quoted as saying "Fitch has retained its negative outlook on India's sovereign credit rating on three concerns"--slowing economic growth, persisting inflation and uncertain fiscal outlook." Analysts say any further downgrade may hit chances of foreign investment in the country.
Fitch has decided to carry forward last year's warning because it still finds "macro-economic trends disappointing. Policy slippage coupled with fiscal loosening ahead of 2014 election will weaken economic growth. The GDP for the current financial ending March 31 can be as low as six per cent."
The forecast by Fitch released today immediately put pressure on the partially convertible rupee which started slipping against the American dollar. Against Monday's 55.23/24 , the rupee yesterday declined to 55.33/35 in early morning deals after another rating agency Standard and Poor's also saw little hope in the country's economic recovery.
On Monday, investor banker Goldman Sachs lauded the domestic share markets for yielding impressive returns irrespective of economic slowdown and yawning gaps in fiscal and current account deficits dragging the macro-economic growth.
Dalal Street analysts said Goldman Sachs praised the Bombay and National Stock Exchanges because of attractive valuation of Indian equities. The 25 per cent and 27 per cent rise in BSE Sensex and NSE Nifty, they say, was on account of US$24.4 billion net buying by foreign funds in 2012 calendar year. The analysts tend to give more credence to Fitch and S&P's observations.
Fitch said: "Our affirmation of BBB- rating in June last year reflected India's diversified economy and high domestic savings policy slippage and/or mounting evidence of structural decline in the trend growth rate such as protracted relatively weak economic data could cause ratings to be downgraded."
S&P also warned of one in three chance of downgrade to "junk" over the next 24 months. This prognosis flies in the face of Moody's and Goldman Sachs projections suggesting India's economy is accelerating on reform promises and declining inflation.
But the government yesterday sought to minimise the issue of ratings downgrade by global agencies like Fitch and said it is right on track to reduce fiscal deficit to 5.3 per cent of GDP in 2012-13.
“We are not worried. We have been saying we are on the right track. But people still distrust us and ask whether we will be able to achieve the fiscal deficit target... We will adhere to fiscal consolidation roadmap”, the department of economic affairs secretary Arvind Mayaram said, when asked about the threat of rating agencies such as Fitch to downgrade India's rating.
The government has taken a number of steps to restrict the fiscal deficit to 5.3 per cent of GDP during the financial year, he said, adding that the process would continue in the subsequent years as well.
In view of rising expenditure and subdued growth in revenue collection, the finance ministry has already raised the fiscal deficit target to a more acceptable level of 5.3 per cent of Gross Domestic Product (GDP), as against 5.1 per cent estimated earlier. Fitch, during a recent conference call in Tokyo, had reiterated its threat to downgrade India's rating against the backdrop of slowing growth, high inflation and rising fiscal deficit.
It had earlier said that the possibility of downgrading the country's sovereign rating was more than 50 per cent in the next 12-24 months.