India outlook downgraded on deficit concerns
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Ratings agency Fitch has downgraded the outlook for India’s BBB- sovereign rating from stable to negative over concerns its growth potential will suffer in lieu of necessary structural reforms.
Reforms include measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.
Although the nation’s finances are said to have improved by the agency, the central government’s deficit is not shrinking at a fast enough rate as it currently stands at approximately 66% of GDP.
India’s progress on fiscal consolidation is described as “limited”.
“Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” according to Art Woo, director in the Fitch Asia-Pacific sovereign ratings group. (article continues below)
The risks outlined by the ratings agency are focused inwardly as India is said to hold very low external debt and sufficient foreign exchange reserves, held by the Bank of India, to provide a cushion against external shocks
Inflation remains high in an environment where GDP growth is losing momentum; falling from 8.4% in 2010/11 to 6.5% in the year ending March 2012, reports Fitch.
Further loosening of fiscal policy would result in further downgrades while an improvement in the country’s investment climate, coupled with a reduction in inflation, would prove “supportive” to its sovereign rating, according to the agency.
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