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The finance ministry's optimism notwithstanding, Fitch Ratings has warned India that any slippage on the policy front would have negative implications for its ratings, currently at lowest investment grade. It also cautioned India that there is much capital still left which could flow out of the country.
"In India and Indonesia, both BBB- (lowest investment credit rating) with a stable outlook, their relatively weak starting positions with high inflation and recent rises in current account deficits (CAD) suggest their credit profiles have limited tolerance for policy slippage that saw their current account deficits and-or inflation rates stay high or rise further," Fitch said in its Emerging Asia: Slowing Growth Amid Market Pressures.
It also said there was plenty of portfolio capital left to flow out of Emerging Asia if there is a further erosion of investor confidence, decline due to exchange-rate depreciation.
"The net portfolio outflow of $ 13 billion from India in June-August 2013 was only seven per cent of India’s end-March 2013 stock of $182 billion in portfolio liabilities," it added.
There is almost a consensus among economists that CAD will come down below $70 billion in the current financial year against $88 billion in 2013-14, as pegged by the finance ministry. However, the ministry is still conservative and retained its projections at $70 billion only. At this level, it comes at around 3.7 per cent of GDP, against the record 4.8 per cent in the previous financial year.
For the first quarter of the current financial year, CAD stood at 4.8 per cent of gross domestic product (GDP) against four per cent in the corresponding period of 2012-13.
Though consumer price inflation fell from 9.64 per cent in July to 9.52 per cent in August, it was still at an elevated level. Besides, the inflation rose for urban areas from 10.18 per cent to 10.32 per cent, even as it fell to 8.93 per cent from 9.14 per cent in rural areas.
However, wholesale price index-based inflation rose from 5.79 per cent in July to 6.10 per cent primarily on food prices. Food inflation rose to 18.18 per cent from 11.91 per cent, even as rate of price rise in manufactured products was down to 1.90 per cent from 2.81 per cent.
The rating agency said a number of emerging Asian sovereigns have experienced declines in their currencies and financial asset prices since May 2013, with India and Indonesia particularly severely affected.
"Some tolerance for market volatility is incorporated into sovereign ratings at their current levels. However, ratings could come under pressure if further sharp and sustained falls in currencies undermined countries’ economic and financial stability, for example by revealing weaknesses in corporate and bank balance sheets."
It said the rupee had fallen 12.2 pre cent between December 2012 and August 2013, even as it recovered from a low on September 3, 2013 when it was down 23 per cent compared with end-2012.
Besides, India's reserves fell 6.8 per cent while Indonesia's fell 17.5 per cent during this period.
On fiscal policy, Fitch expects every sovereign in emerging Asia to run a smaller fiscal deficit in 2013 than 2012, with the exception of China (two per cent versus 1.6 per cent), India (eight per cent versus 7.9 per cent), Thailand (3.3 per cent versus two per cent) and Vietnam (6.3 per cent versus 5.6 per cent).
It should be noted here that the rating agency has not taken just the Centre's fiscal deficit, but the general deficit—combining states' along with.
The rating agency warned emerging Asia that the US Federal Reserve's decision to hold its tapering of quantitative easing was no substitute for effective policy management.
On Tuesday, economic affairs secretary presented an optimistic picture of India's macroeconomic parameters on CAD, the Centre's fiscal deficit and growth fronts. He said the Centre's fiscal deficit would be reined in at 4.8 per cent of GDP as projected in the budget even as it constituted almost 75 per cent of the Budget estimate in the first five months of the current financial year.
Mayaram also exuded confidence of India's economy growing by over five per cent this financial year, even as the expansion crashed to a four-year low of 4.4 per cent in the first quarter. Fitch projections for India's economic growth stood at 4.8 per cent against its earlier forecast of seven per cent.
On Wednesday, Moody's Investors Service also remained unimpressed by the finance ministry's optimism. All three major rating agencies, which include Standard & Poor's as well, have the lowest investment grade for India. Any downgrade for India would mean cutting the ratings to junk, which could have severe implications for investment into India.
