Fitch points too much govt support to deal with stressed asset negative for Indian economy

Fitch has found that excessive government support to banks in order to deal with stressed assets and loose macro-economic policy that could stoke inflation would prove ‘negative’ for Indian economy and told the same on Friday.

“Further deviation of the already-high public-debt burden from the peer median, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the banking sector’s asset quality that would prompt large-scale sovereign financial support...(are) negative sensitivities,” it said.

In its Asia-Pacific Sovereign Overview for April-June quarter, Fitch Ratings also said that “loose macroeconomic policy settings that cause a return of persistently high inflation and a widening current-account deficit, which would increase the risk of external funding stress” are also negative for the economy.

However, Fitch also outlined “positive sensitivities” for India which could come from fiscal initiatives that would cause the general government debt burden to fall more rapidly than expected in the medium term.

“An improved business environment resulting from implemented reforms and persistently contained inflation, which would support higher private investment and real GDP growth” would be positive, the US-based agency said.

Fitch has a ‘BBB-minus’, the lowest investment-grade rating on India with a ‘stable’ outlook.

It said demonetisation could help boost government revenue by moving economic activity from the informal to the formal sector, although withdrawal of high-value currency created a cash crunch, hurting economic activity in the short term.

With regard to reforms, Fitch said over the past year the government has succeeded in passing some big-ticket reforms in the Rajya Sabha, such as Goods and Services Tax and a bankruptcy law.

“The budget for FY18 signalled continued commitment to a broad reform agenda, with a greater focus now on widening the tax base. The budget also announced future measures to attract FDI and simplify labour laws, albeit without concrete reforms in this regard, apart from abolishing the Foreign Investment Promotion Board,” it said.

India’s ratings balance a strong medium-term growth outlook and favourable external balances against a weak fiscal position and a business environment which is still difficult, the agency said.

“However, the latter is likely to improve gradually with a continued broadening of the government’s structural reform agenda,” Fitch added.