India's third-quarter (July-Sept) GDP reading Friday demonstrates the slowdown in the country's performance, Fitch Ratings says. Recent reform proposals, while potentially growth-supportive, need time to work and face political risks to their implementation.
It expects the economic recovery to be shallow. It forecast real GDP growth to fall to 6.0% in FY13 (year to March 2013) from 6.5% in FY12, before recovering to 7% in FY14. This compares with an 8.4% rise in FY11.
The Indian economy grew by 5.3% in Jul-Sept versus a year earlier, down from 5.5% 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. 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.
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.
In June Fitch had revised its 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.
The government has also demonstrated a desire to speed up fiscal consolidation. On October 29, Finance Minister P Chidambaram outlined a five-year roadmap aimed at reducing the central government fiscal deficit to 3% of GDP by 2016-2017. This is a stronger statement of intent than seen for some time.
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.
''Our affirmation of the 'BBB-' rating in June reflected India's diversified economy and high domestic savings,'' it said.
An improved investment climate that supported greater infrastructure investment, and a sharp sustained decline in inflation, would support the rating, it said.
Further it said, '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.'