Fitch, Moody's, S&P uncertain about implementation of reforms

After a poor run with international credit agencies, which saw downgrades in India’s rating outlook in quick succession, the government retorted with a set of big-bang reforms last week.

The reforms swept the markets off their feet at home, but ratings agencies Fitch, Standard & Poor’s and Moody’s are still chary on the country’s prospects.

"India's reforms announced last week at first glance appear credit positive. But there is still considerable execution risk given the Congress-led coalition's divisions and recent track record of policy reversals," said Fitch Ratings on Monday, adding that broader concerns regarding the weak and inconsistent regulatory framework remain. "We await evidence of implementation of the measures on the ground and will also look to see how the economy reacts," it said.

S&P has a similar take. Raising questions over the efficacy of these measures, S&P Director for sovereign ratings, Takahira Ogawa, said in a note: "We believe that the government's recent announcement on foreign direct investments is an encouraging development, but at this stage it is still uncertain whether these measures can be implemented or not."

He expressed concern over the liberty given to a particular state on adopting the changes in the multi-brand retail FDI. "... Hence, the actual impact from this measure might be less than expected," he said on FDI in multi-brand retail. Similarly, on the proposed disinvestment of PSUs, he said, "It depends on the actual implementation of the plan".

In June 2012, S&P warned that India could become the first BRIC economy to lose its investment-grade credit rating, citing slowing economic growth and policy inaction for instituting economic reforms. The rating agency cut India's BBB-minus rating outlook to negative in April, meaning it could likely make a decision within the 6-24 month time frame.

Moody’s said today although the measures seek to address concerns on fiscal position, the effect of the reforms on government's credit profile is minimal since they have rollback or implementation risks.

“However, the effect of the announced reforms on the government’s credit profile is minimal because they are either too small to have material sovereign credit benefits or carry implementation or rollback risks that outweigh any credit positive benefits,” Moody’s stated in a note.

The rating agency in August lowered India’s growth forecast for 2012 to 5.5 per cent and to below 6 per cent for 2013, blaming the “instability created by a government that has badly lost its way”.

“The diesel price increase, along with a cap on households’ use of subsidized cooking gas, signals the government’s willingness to lower its fiscal deficit by embracing the politically unpopular decision of raising prices. However, it will reduce the government’s fiscal deficit by only approximately 0.1 per cent of GDP. As a result, even with the decrease in the diesel subsidy, we still expect the slowdown in government revenue growth.”

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