Fitch lowers India growth forecast, says biz climate weak

Lowering its growth forecast for India to 7.8 per cent this financial year, global rating agency Fitch on Tuesday said the country’s business climate is relatively weak compared with peers and will take time to turn around.

Fitch’s view assumes significance as it follows another global giant Moody’s warning, earlier on Tuesday that there were growing concerns about risk of policy stagnation in India and “some disappointment” has emerged over the pace of reforms under the Modi government.

In its Global Growth Outlook report, Fitch said the government’s “strong drive to implement structural reforms” should lead to improvements in the business environment.

"However, translation of the reforms into higher real GDP growth will depend on the actual implementation. India's business environment is relatively weak compared with peers and will take time to turn round," it added.

Still, Fitch said, it continues to expect a continued acceleration in the Indian economic growth rate, from 7.3 per cent in fiscal 2014-15, which was below Fitch estimate of 7.4 per cent.

"Fitch continues to expect an acceleration in Indian growth, but there are some indications that it may be somewhat slower than previously expected.

"Hence, Fitch has lowered its real GDP growth forecast for India to 7.8 per cent in FY16 from 8 per cent, and to 8.1 per cent in FY17 from 8.3 per cent.

"Capital expenditure has not yet picked up, rural and export demand is weak, and the translation of monetary policy loosening into lower bank lending rates is limited. Downside risks to growth relate, for instance, to below-average rainfall during this year's monsoon season, although the first three weeks of June recorded 16 per cent above-average rainfall," it said.

About the revision of the GDP data series by the Central Statistical Office, Fitch said the new growth levels and a pick-up starting already in mid-2013 remain difficult to reconcile with indicators that show still low investment levels, weak corporate balance sheets and a rise in banks' non-performing loans.

Fitch further said the risks to inflation are tilted to the upside and relate to below-normal monsoon rains, crude prices and external environment volatility, as indicated by the RBI.

"With these risks clearly on the RBI's radar, the window for further rate cuts seems closed for the coming months.

"Yet, the RBI may still respond with another rate cut later in the year if data show these risks have declined and inflation would continue to move broadly in line with the announced glide path.

As regards China, the report said, the growth rate "is in a gradual structural slowdown and our unchanged growth forecast is 6.8 per cent in 2015, 6.5 per cent in 2016 and 6 per cent in 2017".

"India's GDP growth will surpass China's this year for the first time since 1999, and accelerate to 8 per cent in 2016 and 8.1 per cent in 2017. Recovery from the recession in Russia and Brazil will be weak, with growth rates of only 1.5 per cent by 2017," the report said.

The global economy is expected to grow by 2.4 per cent in 2015, Fitch said, while adding that the Greek crisis poses a risk to the economic recovery in Eurozone.