India's growth potential to deteriorate sans reforms: Fitch
Pre-2014 election climate may work as drag
Rating agency Fitch today said India’s growth potential may gradually deteriorate further if the government fails to speed up reforms and narrow the budget deficit.
Noting recent steps on reforms and renewed commitment to fiscal consolidation, Fitch said it remained cautious that progress may prove difficult ahead of national elections due in 20014.
In June 2012, rating agency had revised on outlook on India’s Issuer Default Ratings (BBB-) to negative. India’s medium-to long-term growth potential will gradually deteriorate further if economic reforms are not hastened and the budget deficit is not narrowed.
Stable Outlooks dominate for Emerging Asian sovereign ratings. The region's two giants, China and India, are major exceptions to the Stable Outlook.
"Nine of 11 emerging Asian sovereigns are on Stable Outlook, but stable does not mean static," said Andrew Colquhoun, head of (Asia-Pacific Sovereigns).
The only certainty is that shocks are inevitable. Sovereigns that are building buffers by strengthening their balance sheets and improving their economic fundamentals could see positive rating action - and vice versa.
Fitch said debt ratios are projected to fall slightly in India and Sri Lanka, but those sovereigns‟ high public indebtedness gives limited scope for further fiscal easing if shocks materialise.
India‟s real policy interest rate is already low as inflation has remained stubbornly high at 7.5% (year-on-Year) in October, not far below the 12-month average of 7.8%.
Political Risk Matters
Domestic political events are important for sovereign credit developments in a number of emerging Asian countries in 2012. India and Malaysia, will have national elections in 2014 and 2013 respectively. They have a material influence on policy-making.
The Indian government has committed itself to fiscal consolidation and has promoted structural reforms, although its ability to implement these ahead of elections will be crucial, Fitch said.