Fitch 'warns' India to implement reforms or face rating downgrade
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"Public commitments and policy announcements by the Indian government so far in 2013 are encouraging signals that the authorities want to maintain the momentum towards fiscal consolidation and structural reform generated since last summer," the agency said in a note.
"Recent data show that the authorities have made some progress in capping the fiscal deficit at 5.3 per cent of GDP as a small surplus was recorded in December," it said.
Commenting on its outlook, the note said, "Policy execution and the impact on growth trend will remain key to our ratings assessment."
Fitch had downgraded its outlook on the country's 'BBB-'rating to negative in June 2012 on concerns over growth and inaction on the reforms front.
In early January, it had said the government was likely to miss its fiscal deficit target for FY13 and the country faced the risk of a downgrade in 12-24 months.
Fitch warned that given the country's record on policy implementation and the General Elections scheduled in 2014 "the political and implementation risk remain significant".
"India's patchy performance on policy implementation, and the approach of elections in 2014 could impede fiscal consolidation, suggesting political and implementation risk remain significant," it said.
Fitch said the budget for FY14 will be an important gauge to determine the government's resolve and commitment to the process of fiscal consolidation.
"However, it (the budget) is not the sole rating driver. A credible medium-term fiscal consolidation plan remains key," it said, adding, "we also need to observe the impact of reform and more broadly see how India's macroeconomic outlook develops over time," it said.
Finance Minister P Chidambaram during investor roadshows in the past fortnight had said that the government was committed to reign in the fiscal deficit at the mandated levels of 5.3 per cent for FY13 and cut it down further to 4.8 per cent in FY14.
The road shows, held in Hong Kong, Singapore and Frankfurt, come after reform measures like relaxing foreign holding norms in multi-brand retail and aviation, increasing rail fares, raising the limit on foreign investment in rupee bonds, and a gradual plan to align diesel prices with market realities.
A host of factors like inaction on the policy front, slowdown in growth and the perceived inability to meet fiscal deficit targets had led rating agencies like Fitch and S&P to downgrade their outlook on the country's sovereign rating in mid-2012 to negative from stable.
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