The chances of Fitch downgrading India are very limited, but the global rating agency is sticking to its estimate of 5.8 per cent fiscal deficit this financial year against the government’s estimate of 5.3 per cent.
Atul Joshi, head of India ratings at Fitch, told NDTV that some policy measures of the Indian government have been well-received by the global community, and that the policy paralysis in the country seems to be coming to an end. India has faced persistent criticism and threats of a downgrade due to its policy paralysis and lack of implementation of any policy changes announced due to political compulsions.
Fitch continues to maintain its negative outlook for now, Mr Joshi said, adding that the agency was waiting to see how the government plans to bridge the gap in fiscal deficit.
Prime Minister Manmohan Singh on Saturday said the economic "gloom and doom" clouding the country in recent years has been dispelled, and that he is determined to push ahead with further reforms.
"Growth decelerated to 6.5 per cent last year and may be only around 6 per cent in the current year," he said at an event in Mumbai. "This has dampened investor sentiment.”
On Monday, India was hit by a slew of poor economic data, indicating that the economy has yet to head towards growth.
Industrial output unexpectedly contracted on weak consumer demand in September, adding to pressure for action by the government with Asia's third largest economy increasingly likely to post its slowest growth in a decade.
Data released by the Central Statistics Office showed output at factories, mines and utilities shrank an annual 0.4 per cent.
Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 per cent to overall GDP, fell 1.5 per cent in September from a year ago.
The annual consumer price inflation rose in October to 9.75 per cent. India's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa - and is way above what the Reserve Bank of India (RBI) calls its comfort level.
Food prices for consumers stood at to 11.43 per cent in October from 11.6 per cent in September.
India's exports fell 1.6 per cent to $23.2 billion in October, while imports jumped 7.37 per cent to $44.2 billion, leaving a widening trade deficit of $20.9 billion, according to a Commerce and Industry Ministry statement released today.
There may be more bad news in the offing. The headline inflation numbers – due to be announced at 12 p.m. Wednesday – has likely accelerated to an 11-month high in October on costlier fuel and food, a headache for the government in a battle with the central bank over spending and high interest rates ahead of state elections.
Headline inflation has averaged close to 9 per cent since January 2011.
The government is pressing the central bank to join efforts to revive activity ahead of a general election due in just over a year and several state polls before that. Election-related spending could put additional upward pressure on prices next year.
But the Reserve Bank of India (RBI) has thus far rebuffed those calls, saying prices are still rising too fast to risk loosening policy much. The bank says rising rural wages, a result of government policies, are stoking inflation.
The next monetary policy review is due in December. The central bank has said any interest rate cut is "highly improbable" at that meeting, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September.
The government was forced to tackle diesel prices after Standard & Poor's and Fitch warned that the burgeoning fiscal deficit put India's investment grade credit rating under threat.
Last month, the government announced additional steps including spending cuts, a move perceived to be an olive branch to the RBI. Finance Minister P. Chidambaram pledged to nearly halve the government's fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to lower rates, but offered few concrete steps.
(With inputs from Reuters)