Fitch Ratings has scaled down its credit outlook for India from ‘stable’ to ‘negative’, owing to limited progress on fiscal consolidation and heightened risks to growth, which resulted from the tardy pace of structural reforms.
The rating agency, however, reaffirmed long-term foreign- and local-currency issuer default ratings at ‘BBB-’ and the short-term foreign currency rating at ‘F3’. India's country ceiling was also affirmed at ‘BBB-’, Fitch said in a statement on Monday.
The outlook revision reflects heightened risks of India’s medium- to long-term growth potential deteriorating if structural reforms were not hastened. These reforms include steps to create a more positive environment for business and private investments. The negative outlook also shows India's limited progress in fiscal consolidation, particularly in reducing the Centre’s deficit, despite the improving financial health of state governments.
“Against the backdrop of persistent inflationary pressures and weak public finances, there is a greater onus on effective government policies and reforms. These would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-term growth potential of the economy,” said Art Woo, director, Asia-Pacific Sovereign Ratings, Fitch.
The rating affirmation shows India’s diversified economy and its high domestic savings, which reduce reliance on foreign investors for private investment and funding. The government is able to issue long-term debt at low costs in its own currency.
The rating agency has revised its forecast for growth in real gross domestic product (GDP), following the sharp loss in domestic economic momentum and increasing concern over the health of the global economy. Real GDP is now forecast to grow 6.5 per cent and seven per cent in 2012-13 and 2013-14, respectively, compared with the previous forecasts of 7.5 per cent and eight per cent, respectively.
Though India’s net external debt is very low, the Reserve Bank of India’s high foreign exchange reserves provide a cushion against potential external shocks. The underlying drivers of the last decade of rapid economic growth remain in place---a fast growing pool of educated workers and an innovative private services sector.