FM refutes Fitch’s outlook downgrade; accuses of ignoring recent positives

Refuting global rating agency Fitch’s recent downgrade of India’s sovereign rating to negative, India’s Union Finance Minister Pranab Mukherjee, who has emerged as the front runner in the race for becoming the next President of India, lashed out at the rating firm’s recent assessment stating that recent structural reforms in the economy including the strengthening of public finances were not taken in to account. Stating that there was no surprise in the Fitch’s recent announcement and it came on expected lines, however the finance minister underscored that Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy.

The finance minister’s reaction came in response to the rating agency’s press release on India’s sovereign credit rating in which Fitch reaffirmed India’s long-term foreign and local currency issuer default rating (IDR) at BBB(-) however, it revised Asia's third largest economy’s outlook to Negative from Stable. The credit rating firm cited concerns on India’s economic growth potential, inflationary pressures and weak public finances as the major challenges, which led to the downward revision in the sovereign rating outlook. Apart from this, the rating agency also downgraded the credit outlook of seven Public Sector Undertakings (PSUs) including NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC.

Fitch’s revision in India’s outlook has come on the heels of another global rating agency Standard & Poor's recent note in which it has warned that India may become the first among the BRIC (Brazil, Russia, India and China) countries to lose its investment grade rating. Around two months ago, S&P’s had reviewed India’s sovereign debt rating and though they had reaffirmed the nation’s long-term rating but slashed the rating outlook to negative from stable citing weak GDP expansion prospects and the risk that its external liquidity and fiscal flexibility may wear down.

While Pranab Mukherjee stated that the government has already taken note of the concerns that the Fitch brought forward, however he voiced his dismay over the rating agency’s assessment of the Indian economy for not taking into account the recent positive developments. He elucidated that there were several positives for the economy viz. RBI’s stimulus measures like a cut of 50 basis points key interest rates in April 2012; core inflation declined significantly from 8.7% in May 2011 to less than 5% in May 2012; progress has been made on fuel linkage for coal based power projects; and the quarterly investment growth rate has become positive in the fourth quarter of 2011-12.

Furthermore, he pointed that the decline in international oil prices in recent weeks and absence of any major adverse results on corporate performance in the last quarter of 2011-12 are all factors that would have a positive impact on the government’s fiscal position and more generally on India’s economic growth. Initiatives taken recently to improve the growth prospects include a seven-pronged strategy to increase exports and the new thrust given to the infrastructure sectors by the Prime Minister, by inter-alia significantly scaling up the targets in the Road, Railway, Port, Civil Aviation, and Power sectors and reviewing the progress at the highest level. All these factors should help in the recovery of domestic growth momentum.