Absence of reforms can affect growth, says Fitch

India’s growth potential will deteriorate further if the government doesn’t hasten the reforms process and narrow the Budget deficit, according to rating agency Fitch. Despite the recent reforms initiative and the renewed commitment to fiscal consolidation, the rating agency maintained a cautious outlook, saying progress would be difficult ahead of the national elections in 2014.

In June, Fitch had revised its outlook on India’s issuer default ratings to negative (BBB-), saying India’s medium- to long-term growth potential would take a hit if economic reforms were not given priority and unless the government took urgent steps to bridge the Budget deficit. While the rating agency has given ‘stable’ status for most of emerging Asian sovereigns, China and India are major exceptions. “Nine of 11 emerging Asian sovereigns are on ‘stable outlook’, but stable does not mean static,” said Andrew Colquhoun, head of (Asia-Pacific Sovereigns) at Fitch Ratings.

Sovereigns that are building buffers by strengthening their balance sheets and improving their economic fundamentals could see positive rating action - and vice-versa.

According to Fitch, debt ratios would 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 per cent (year-on-year) in October, not far below the 12-month average of 7.8 per cent.

Domestic political events are important for sovereign credit developments in a number of emerging Asian countries in 2012. Malaysia and India will have national elections in 2013 and 2014, respectively. They have a material influence on policy-making.

The Indian government has committed to fiscal consolidation and has promoted structural reforms, although its ability to implement these ahead of elections will be crucial, Fitch said.