Spectre of downgrade haunts India

India Dispatch: The threat of India's sovereign rating being downgraded to junk status is persisting, despite the government's efforts to bolster the economy.

India is grappling with a ballooning fiscal deficit and high inflation levels. Findlay Kember / AFP
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The threat of India's sovereign rating being downgraded to junk status persists, despite the government's renewed efforts to bolster the economy.

Fitch Ratings has warned that weak GDP data released on Friday only confirmed India's economic slowdown, while recently announced reforms will take time to filter through.

"Recent reform proposals, while potentially growth-supportive, need time to work and face political risks to their implementation," said the agency.

"Policy slippage 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."

Significantly, this means that India remains at risk of becoming the first Bric country to lose its investment grade rating.

The issue first came into sharp focus when Standard & Poor's published a report in June titled: "Will India be the first Bric fallen angel?"

Both S&P and Fitch earlier this year downgraded India's credit outlook to negative.

The latest warning comes as India strives to attract more foreign investment to boost its economic growth. The government in September announced a series of economic reforms, including allowing foreign companies to take a stake up to 51 per cent in supermarkets and permitting foreign airlines to buy up to 49 per cent in India's private carriers.

But opposition parties are challenging the government's move to open up the retail sector, arguing the move will hurt shopkeepers. This has meant that the winter session of parliament has been in a deadlock for the past week.

The market is also waiting for other initiatives, including a proposed national investment board, while plans to open up the insurance and pension sectors to more foreign investment are awaiting parliamentary approval.

"Political and implementation risk remains considerable," said Fitch. "Several proposals still require legislative approval, and policy reversals cannot be ruled out."

Economic data released on Friday showed that India's GDP growth in the July to September quarter slipped to 5.3 per cent compared with 5.5 per cent in the previous quarter. India is also grappling with a ballooning fiscal deficit and high inflation levels.

The government has said that consistent growth of 8 per cent a year was needed to create jobs for the millions of Indians entering the labour market each year.

Fitch said it expects India's economic recovery to be "shallow", forecasting that economic growth will fall to 6 per cent in the financial year to March, compared with 6.5 per cent for the previous year. It then expects growth to increase to 7 per cent in 2013-2014. But Fitch added that manufacturing data from HSBC released on Monday suggested that growth may have "troughed".

HSBC's India manufacturing Purchasing Managers' Indexrecorded a five-month high of 53.7 for last month.

"The manufacturing sector gained momentum thanks to a strong pickup in new orders, which lifted output growth," said Leif Eskesen, the chief economist for India and Asean at HSBC.

S&P in October said that India still faced a one-in-three chance of its sovereign rating being downgraded in the next two years.

"A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," S&P said in its October report.

"On the other hand, we may revise the outlook back to stable if the government implements initiatives to reduce structural fiscal deficits, improve its investment climate, and increases growth prospects.

"Fiscal measures to lower deficits could include a more efficient use of fuel, fertilizer and agricultural subsidies, or the implementation of a goods and service tax."