Indian Slowdown Confirmed by Latest Q3 GDP Figures, Fitch Calls for Reform

India’s third quarter gross domestic product (GDP) grew by 5.3%, down 0.2% from the previous quarter, and Fitch Ratings is predicting only a shallow economic recovery unless the government forces through structural changes. 

Recent reform proposals and liberalisation moves could be growth-supportive, says the credit ratings agency (CRA), but the reforms need time to work and still face political risks to their implementation. 

Fitch is forecasting real GDP growth in India to fall to 6% in FY13 (year to March 2013) from 6.5% in FY12, before recovering to 7.0% in FY14. This compares with an 8.4% rise in FY11. 

The lessening off of growth in Q3 is down to a fall in merchandise exports and merchandise non-oil imports in October, says Fitch, which also points to the Indian economy’s struggle to return to previous growth rates in its assessment. 

The upbeat HSBC manufacturing PMI read of 53.7 for November suggests growth may have troughed, adds the CRA. 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. Fitch revised its Outlook on the country in June a ‘BBB-‘ rating with Negative tendencies. 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, adds the CRA. 

Since the summer the Indian government has, however, announced an increase in the amount of foreign direct investment (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. 

Still Considerable Risks

Political and reform implementation risk remain considerable in India, says Fitch. 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 its 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 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. 



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