Tuesday, June 19, 2012

Fitch downgrades India’s credit rating outlook to negative

NEW DELHI, June 19, 2012

Within three months of Standard & Poor's action in April and its follow-up threat last week, global rating agency Fitch, on Monday, scaled down India's sovereign credit outlook to 'negative' from 'stable' while citing much the same reasons as S&P — corruption and the absence of or inadequate reforms.

However, unlike in the case of S&P's strictures when the government appeared to go on the defensive, Finance Minister Pranab Mukherjee junked the downgrade saying that the rating agencies' observations were based on "old data" and did not reflect the recent developments.

In a statement, pointing out that the revision in rating outlook by Fitch to the lowest investment grade notch was because it had ignored the recent positive economic trends, Mr. Mukherjee said: "While the markets had already anticipated that Fitch would revise the outlook and so there is no surprise in the announcement, it must be pointed out that Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy". Chief Economic Advisor Kaushik Basu, on the other hand, dubbed Fitch's action as "herd mentality" and expressed no surprise over the outlook downgrade. "There is a herd mentality among policymakers, herd mentality among corporates. There is also little bit of herding among credit rating agencies. We were pretty much expecting Fitch to do so," he said. He, however, admitted that even while there was some deep strength in the country, "there is lot to be done. I think that the next six months will be crucial," he said.

Announcing the lowering of sovereign rating oulook, Fitch Ratings, in a statement, said that India was faced with an "awkward combination" of slow growth and elevated inflation as well as structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms.

Outlook for PSUs

Fitch went on to point out that the revision in outlook reflected the "heightened risks" that India's medium-to-long-term growth potential would gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments. It, however, retained India's sovereign rating at 'BBB-', a notch above the speculative grade.

Alongside, the rating agency also downgraded the credit outlook of seven PSUs — NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC.

Countering the Finance Minister's comment on the economic data used for the credit rating analysis, Director of Fitch's Asia Pacific Sovereign Ratings Group Art Woo said that Fitch reviewed India most recently, typically, on a broad range of factors, such as macroeconomic policy, economy and public finances. "Negative, more precisely mean over 12-24 months there is a chance that India's rating could be downgraded," he told a TV channel.

The Indian government, Fitch said, had repeatedly delayed tax and subsidy reforms and thus the confluence of weaker economic growth and a large subsidy bill "means India will likely miss its 5.1 per cent of deficit target for 2012-13". While pegging the fiscal deficit target at around 5.6-5.9 per cent of the GDP, the rating agency also lowered the GDP growth forecast to 6.5 per cent in 2012-13 from its earlier projection of 7.5 per cent.

Mr. Mukherjee, on his part, asserted that Fitch had not taken cognizance of many of the government's recent initiatives which include fertilizer subsidy reform, capping of subsidies as a fraction of GDP (gross domestic product), the new manufacturing policy and the telecom policy.

The Finance Minister also highlighted the fact that foreign institutional investors (FII) have since reposed renewed faith in the country's economy and have already brought in a net $12.3 billion in the first five months of 2012 as compared to $8.3 billion invested during the full calendar year of 2011.
News From: http://www.7StarNews.com

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