Fitch warns of India rating downgrade in 12-24 months

Higher fiscal deficit and lower growth coupled with high current account deficit has seen global rating agencies threatening to junk India’s sovereign rating.

And now rating agency Fitch has once again warned of a possible rating downgrade for India in the next 12-24 months due to the economy’s widening fiscal deficit.

In a teleconference, Fitch ratings said that India is likely to miss its fiscal deficit target of 5.3 percent of gross domestic production- higher than a previous target of 5.1 percent but lower than last year’s 5.8 percent- while other macroeconomic trends too have been disappointing.

Fitch said it is awaiting the final fiscal numbers for the current year and that the Union Budget for the fiscal year 2013-14 will be important for ratings.

The rating agency said high current account deficit is a concern and the ability to fund the deficit is crucial.

In December, data published by the Reserve Bank of India showed the country’s current-account deficit widened to a record high of $22.3 billion, or 5.4% of gross domestic product, in the July-September quarter, from $16.4 billion in the April-June period despite a surge in foreign investment and government’s measures to curb expenditure.

Export growth remained in the negative zone and the fall is sharper than in imports, where non-oil imports are negative, while oil import growth is positive.

As Firstpost blogger Madan Sabnavis said earlier the problem lies in providing too much elbow-room to FIIs in the debt market - corporate bonds, infrastructure and government securities - which is pragmatic.

“We need to ensure that we do not do silly things like retro taxation or GAAR without thinking the measures through. Our balance of payments is clearly in the hands of foreigners today, given how things have turned out.Counter-intuitive reasoning would say that in case we had not corrected our stance on these two after the budget, we would have been in a desperate situation today as deferment of these so called ‘bold measures’ did help to bring back the funds. This is not the best situation to be in, but frankly we have little options here.”

In December 2012, Fitch had warned that India’s growth potential could deteriorate if the UPA government did not speed up reforms and narrow the fiscal deficit ( the gap between government revenues and expenditure). Fitch had said it was cautious on India since progress on reforms seemed diffcult ahead of the national elections due in 2014.

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

Subdued tax revenues in a slowing economy have aggravated fiscal strains and both Standard and Poor’s and Fitch have placed “negative” outlooks on India’s current BBB-minus ratings, putting India in danger of being the first of the BRICS grouping of fast-growing economies to be downgraded to junk status.

Standard & Poor’s, had also warned that India still faced one-in-three chance of downgrade in its sovereign rating to junk grade over the next 24 months due to high fiscal deficit and debt burden, whole Moody’s was the only agency bullish on India and has said the country’s growth prospects for 2013 have improved.

“Broadly, India’s fiscal profile is a rating weakness,” S&P had said in a note, last month.

“Given the political cycle - with the next elections to be held by March 2014 - and the current political gridlock, we expect only modest progress in fiscal and public sector reforms,” it said.

However, with the prospect of a downgrade looming large, the government had announced a slew of reforms since mid-September, raising the price of diesel and fertilizer, and lifting the bar on foreign investment in the airline, insurance, pensions and retail sectors to shore up the economy.

With inputs from Reuters