Red Flag On Reforms

03 Dec,2012 13:25 IST

Red Flag On Reforms

Fitch second rating agency after Moody's to warn on India's rating Outlook recently. Investment banks gung-ho on growth story

BW Online Bureau


Boosted by strong export orders and a surge in output India's manufacturing sector beat the expectations of economists to grow at its fastest pace in five months in November. Ironically, the same day, ratings agency Fitch said India's sovereign rating could be cut if the government loosens fiscal policy in the runup to elections due by 2014 or sees a prolonged slowdown in economic growth.

The government's stuttering economic reforms face a test this week as Parliament votes on whether to let foreign supermarket chains such as Wal-Mart set up shop, a move that could pave the way for further measures to revive the economy. Market expectations have risen riding on news that the Parliamentary vote is non-binding one and the Sensex has crossed the  19,000-mark and it has bolstered the rupee as well. But defeat for the ruling Congress party could see the currency tumble to 56 to the dollar from about 54

The Fitch statement comes days after Moody's said that rating outlook of India is stable due to its strong economic growth along with high savings and investment rates.

Both Fitch and Standard & Poor's earlier this year cut their ratings outlooks for Asia's third-largest economy to negative, putting the country in danger of being the first of the Brics grouping of fast-growing economies to be downgraded to junk status.

On 3 December, the HSBC manufacturing Purchasing Managers' Index (PMI), which gauges the business activity of India's factories but not its utilities, rose to 53.7 in November from 52.9 in October. Readings above 50 denote growth, and economists had forecast a rise to 53.1 in November.

Read: Factory Index Accelerates to 5-month High
Read: Looking For The Positive

Government data released on 30 November had already shown that India's infrastructure sector output grew 6.5 per cent in October from a year earlier, higher than a revised annual growth of 5 per cent in the previous month.

Fitch said weak GDP data on 30 November confirmed the slowdown in the economy, and recent reform proposals by the government, while potentially supportive of growth, would need time to work and face political risks in their implementation. "Policy slippage and/or mounting evidence of a structural decline in the trend growth rate, such as protracted relatively weak economic data, could cause the ratings to be downgraded," its report said.

Investment bank Morgan Stanley, on the other hand, has raised India's FY13 GDP growth forecast to 5.4 per cent from 5.1 per cent, citing better-than-expected GDP growth for the September quarter and also the stabilisation in non-agriculture growth indicators. Another investment bank, Goldman Sachs, also pointed out that India's economic growth is likely to accelerate to 6.5 per cent in 2013 backed by favourable external sector demand outlook and a pick-up in domestic reforms. The Indian economy is likely to grow at 7.2 per cent in 2014, compared with 5.4 per cent in 2012, the report said.

Read: Morgan Stanley Raises FY13 GDP F'cast

Read: India To Grow 6.5% In 2013: Goldman Sachs 

The Indian economy extended its long slump in the September quarter, growing only 5.3 per cent, below the 5.5 per cent expansion seen in the three months to June, keeping it on track for its worst year in a decade.

Fitch expects economic recovery to be shallow with real GDP falling to 6 percent in the  current fiscal year from 6.5 per cent in the previous year before recovering to 7 percent in the year that ends March 2014.

The agency, however, pointed out that the upbeat HSBC PMI reading earlier in the day suggests that growth may have troughed. India's manufacturing sector beat the expectations of economists to grow at its fastest pace in five months in November, boosted by strong export orders and a surge in output, a business survey showed on Monday.

"However, tight fiscal and monetary policy settings decrease the authorities' scope to support growth amid stubbornly high inflation and a commitment to consolidating public finances," the report said.

Fitch said several of the proposals announced by the government require legislative approval and policy reversals cannot be ruled out.

The government opened doors for foreign direct investment into sectors like multi-brand retail in
mid-September but the parliament remains in deadlock, with no decisions reached since the start of the winter session on November 22.

"The approach of general elections in 2014 means there is little time to fully enact reform. These risks are reflected in the Negative Outlook," Fitch added.

Fitch also pointed out that the government's five-year road map for reducing the fiscal deficit to 3
per cent of GDP by 2016-17 is a stronger statement of intent than seen in some time, but added that India's track record of delivering on fiscal policy goals has not been encouraging.

"A loosening in fiscal policy ahead of the elections could further weaken India's public finances and put pressure on the ratings," it said.

However, India also appears to be facing structural challenges to its investment climate.

India's medium-to-long-term growth potential could gradually fall if further structural reforms that would improve the operating environment for business and private investment are not speeded up, Fitch added.

The statement also said that tight fiscal and monetary policy settings decrease the authorities' scope to support growth amid stubbornly high inflation and a commitment to consolidating public finances.

(With input from Agencies)

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