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Posted on Dec 03, 04:41PM | IBNS
India's third-quarter (July-Sept) GDP reading Friday demonstrates the slowdown in the country's performance, Fitch Ratings said on Monday.
Recent reform proposals, while potentially growth-supportive, need time to work and face political risks to their implementation, said Fitch.
"We expect the economic recovery to be shallow. We forecast real GDP growth to fall to 6.0pc in FY13 (year to March 2013) from 6.5pc in FY12, before recovering to 7.0pc in FY14. This compares with an 8.4pc rise in FY11," said Fitch in a press release.
The Indian economy grew by 5.3pc in Jul-Sept versus a year earlier, down from 5.5pc in April-June.
"The fall in merchandise exports and merchandise non-oil imports in October also points to the economy's struggle to return to previous growth rates. The upbeat HSBC manufacturing PMI read of 53.7 for November suggests growth may have troughed," said Fitch.
"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."
Fitch said evidence of slowing growth has been accumulating in 2012, and has been consistent with a cyclical slowdown.
"However, India also appears to be facing structural challenges to its investment climate. As we said in June when we revised our Outlook on its 'BBB-' rating to Negative, 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," said the global rating agency.
"Since then, the government has announced an increase in the amount of FDI permitted in a range of industries including the power sector, and allowed individual states to approve FDI in multibrand retailers (subject to certain conditions).
"It has also adjusted fuel subsidies to better direct them towards the poor. In October it announced that the prime minister would chair a National Investment Board to accelerate implementation of key projects. Infrastructure deficiencies were highlighted by summer power shortages estimated to have affected 600 million people," said Fitch.
"But political and implementation risk remains considerable. Several proposals still require legislative approval, and policy reversals cannot be ruled out. The approach of general elections in 2014 mean there is little time to fully enact reform. These risks are reflected in the Negative Outlook."
"The government has also demonstrated a desire to speed up fiscal consolidation. On 29 October Finance Minister P Chidambaram outlined a five-year roadmap aimed at reducing the central government fiscal deficit to 3pc of GDP by 2016-2017. This is a stronger statement of intent than seen for some time," it said.
"Again, however, India's track record of delivering on fiscal policy goals is not encouraging. It has gone off track before with similar plans, such as that under the Fiscal Responsibility and Budget Management Act of 2003 or in the Thirteenth Finance Commission report of 2010.
"A loosening in fiscal policy ahead of the elections could further weaken India's public finances and put pressure on the ratings."
Fitch said: "Our affirmation of the 'BBB-' rating in June reflected India's diversified economy and high domestic savings. An improved investment climate that supported greater infrastructure investment, and a sharp sustained decline in inflation, would support the rating.
"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."