India faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms, the ratings agency said
Fitch Ratings said it revised India's outlook to negative from stable due to heightened risks to India's medium to long term growth potential.
"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, director in Fitch's Asia-Pacific Sovereign Ratings group.
The ratings agency said its outlook revision reflects heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.
"The negative outlook also reflects India's limited progress on fiscal consolidation and, in particular, on reducing the central government deficit despite improvement in the financial health of state governments," it added.
Fitch Ratings affirmed India's long-term foreign- and local-currency issuer default ratings (IDRs) to BBB-, short term foreign currency ratings at F3 and country ceiling at BBB-.
The rating affirmation reflects India's diversified economy and its high domestic savings which reduce reliance on foreign investors for private investment and fiscal funding. The Indian government is able to issue long-term debt at a low cost in its own currency. Net external debt is very low and still high foreign exchange reserves of the Reserve Bank of India (RBI) provide a cushion against potential external shocks. The underlying drivers of the last decade of rapid economic growth remain in place - a fast growing pool of educated workers and an innovative private services sector, it said.
Fitch, however, notes that India faces an awkward combination of slowing growth and still-elevated inflation. Real GDP grew just 6.5% year-on-year (yoy) in FY12, down from an 8.4% rise in FY11. India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms.
Fitch forecasts real GDP to rise 6.5% yoy in FY13, down from a previous projection of 7.5%. Headline wholesale price index (WPI) rose 7.6% yoy in May 2012, up from 7.2% yoy in April. Fitch is projecting WPI to rise by an average of 7.5% in FY13 which, though lower than the 8.8% rise in FY12, continues to be higher and stickier than Fitch previously expected, diminishing scope for monetary policy flexibility.
India's public finances are a key rating weakness compared with other 'BBB'-rated sovereigns, which constrains scope for fiscal policy flexibility. Fitch estimated general government debt stood at 66% of GDP at end-FY2011-12, against the 'BBB' median of 39%. Moreover, India's government revenue in-take is low at 19.4% of GDP.
The central government fiscal deficit climbed to 5.8% of GDP in FY2011-12, against a target of 4.6%, largely reflecting an overshoot in subsidy spending. The government has repeatedly delayed reforms to the tax and subsidy systems. The confluence of weaker economic growth and a large subsidy bill means India will likely miss its 5.1% of GDP deficit target for FY2012-13; Fitch expects it to be 5.6%-5.9% of GDP. General elections due in early 2014 could see politically driven pressure to loosen fiscal policy, which could further weaken India's public finances relative to peers, the ratings agency added.
India's external financial position remains a rating strength, although this is eroding as foreign exchange reserves have fallen at 11% since August 2011 and net external indebtedness is rising. Reserves remained at $286 billion as of end-May 2012, equal to six months of current external payments, which still provides the sovereign with an important buffer during periods of elevated global risk aversion. The sovereign is a net external creditor to the tune of 10.2% of GDP at end-FY2011-12, against the 'BBB' median of 3.3% of GDP or the 'BB' median of negative 4.1% of GDP.
According to the ratings agency, slowing growth should curb India's current account deficit and slow the weakening of the external finances, although oil prices pose a risk. Prolonged and intensified pressure on the currency and/or foreign reserves would be negative for the credit profile.
A significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India's sovereign ratings. In addition, a material downward revision of Fitch's assessment of the India's medium-term growth potential along with persistent high inflationary pressure would hurt India's sovereign creditworthiness.
Conversely, an improvement in India's investment climate, which supports greater infrastructure investment and a sharp sustained decline in inflation, would be supportive for India's sovereign ratings. Fiscal consolidation and structural budget reform would also support the ratings, Fitch added.
Following a disappointing economic growth of nine-year low of 6.5% in FY12, there have been concerns that India's expansion rate this fiscal may slip further
New Delhi: Dismissing concerns that India's growth rate may drop below 6.5%, Finance Minister Pranab Mukherjee on Monday said 2012-13 would be the turnaround year for the economy, reports PTI.
Addressing a conference of top officials of the Income Tax (I-T) Department, he said steps are being taken to put India back on path of high economic growth.
"We are taking all necessary steps to ensure that we come back to the path of the targeted GDP growth. Of course it will take some time...but from this year we expect to make a turn around," Mukherjee said.
In the Budget 2012-13, the government had pegged 2012-13 GDP growth at 7.6% (plus, minus 0.25%).
Following a "disappointing" economic growth of nine-year low of 6.5% in 2011-12, there have been concerns that India's expansion rate this fiscal may slip further.
Mukherjee said that after the 2008 economic crisis, the GDP growth slipped to 6.7% in 2008-09, but bounced back to 8.4% in the following two financial years.
Highlighting the positives in the economy, Mukherjee said interest rate cycle has been reversed and there is growth in mining sector, turnaround in investment growth rate and there are predictions of normal monsoon, besides decline in crude oil prices.
"All these factors should help in recovery of domestic growth momentum," he added.
On direct tax collection target of Rs5.70 lakh crore ($103 billion) for the current fiscal, he said it was achievable. "I do feel this target is moderate and can be achieved," he said while asking the tax officials to work "relentlessly" to improve tax collection.
In 2011-12, the direct collection at Rs4.95 lakh crore was marginally down from the revised target of Rs5.05 lakh crore.
Mukherjee said that while renewed growth momentum will help improve direct collection, there are several challenges before the I-T Department.
He expressed concern over decline in tax-GDP ratio and asked the officials to reverse the trend. The tax-GDP ratio has dropped to 10.5% in 2011-12, from 12% in 2007-08.
Mukherjee said the Direct Tax Code (DTC) Bill will be introduced in Parliament in the forthcoming Monsoon Session and would be affected from next fiscal.
"I am hoping that DTC will be effective from 1 April 2013," he said, adding that the time has come for the I-T Department to prepare itself for the transition from the Income Tax Act, 1961 to the new direct tax regime.
The Finance Minister further said the department has been striving to check the menace of black money and tax evasion, which eat into the vitals of the economy and pose threats to national security through linkages to money-laundering and terrorism.
He said the government has commissioned a study on unaccounted income and wealth and it is likely to be completed in September.
Also, a report of a committee on strengthening of existing laws relating to black money is being examined by the government.
"I hope that these two studies will help in identifying the gaps in present legislative and administrative framework and shall help us in checking the menace of black money through an effective policy response," Mukherjee added.
He also said introduction on the Benami Transactions (Prohibition) Act, 2011, currently being scrutinised by a Parliamentary Standing Committee, will further help in "our resolve to reduce the menace of black money".
Amid undeclared assets held by Indians abroad being a matter of "intense debate recently", Mukherjee said that to encourage and facilitate real time exchange of information on cross-border transactions with other jurisdictions, India has set up 8 more Income Tax Overseas Units (ITOUs).
After a comprehensive review of the existing network, steps are being taken to augment the reach of the ITOUs in more jurisdictions, he added.
Enlarged network of ITOUs, with an enabling legislative framework in the form of Double Taxation Avoidance Agreement (DTAA) and Tax Information Exchange Agreement (TIEAS), will help in receiving valuable information in future, he said.
On promoting voluntary compliance of tax laws and role of children, Mukherjee said there was a need to educate them on the importance of taxes for the nation building process.
He said the I-T Department has partnered with NCERT to introduce information in this regard in school textbooks.
He, however, expressed concern over rising litigation with tax payers and amount locked up in appeals before CIT (A), ITAT and different courts.
A whopping over Rs4.36 lakh crore was locked in about 2.59 lakh cases as on December 31, 2011.
The main reason for pendency of cases before CIT (A), he said, appears to be slower disposal rate vis-a-vis the pace of cases being filed. On an average, it takes about one and half years to dispose of a case.
"The Department needs to ensure that after proposed cadre restructuring sufficient manpower is deployed to reduce the time taken for disposal of appeals and that it is not more than six months" he added.
Mukherjee said he has been directing the I-T Department to reduce all avoidable litigation with the taxpayers as well as with employees.
"I have also asked CBDT to ensure that no charge sheets are filed on the last date of retirement," Mukherjee said.