India’s sovereign credit rating may fall below investment grade within the next 12-24 months, warned Fitch Ratings on Monday, as the country continues to struggle with an uncertain investment climate, which has deterred several foreign investors.
According to Art Woo, a director in Fitch's APAC Sovereigns team, there was now a “more than 50 percent chance” that India’s sovereign rating would be downgraded within the next two years, following his company’s decision to also lower the nation’s credit outlook from stable to negative in June.
Additionally, Woo noted that India was facing challenges in implementing structural reforms, which threatened to negatively affect the country's medium-to long-term growth potential and weaken the nation’s investment climate.
"The Indian economy is facing a challenging environment as the macroeconomic picture has turned unfavourable as growth has experienced a sharp slowdown, while inflation pressures have remained persistent.”
“The negative outlook suggests there is a more than likely chance of Fitch revising rating downwards from 'BBB-' to 'BB+' in the next 12 to 24 months. When we say more than likely chance, this essentially translates into more than 50 per cent chance," said Woo, in an interview with the Press Trust of India.
The latest Fitch estimates now place India’s general government debt at 66 percent of its GDP – significantly higher than other similarly-rated ‘BBB-’ peers at 39 percent. ‘BBB-‘ is the lowest level for investment grade bonds.
On August 9, fellow big-three credit rating agency Moody's also slashed the nation’s economic growth projection to 5.5 percent, citing the turbulent global conditions and domestic policy paralysis as the reasons behind India’s economic slowdown.
In an interview with the Indo-Asian News Service, Germany’s Ambassador to India, Michael Steiner also said that the Indian government had to ensure that there was policy and judicial stability within the government itself, before foreign investors would be confident enough to invest in the country.
“India has to show that it is willing to take policy initiatives to protect foreign investments in the country. Currently, there is a lot of speculations going about the Indian economy,” Steiner noted.
One way to dispel the negativity surrounding the investment environment in India, Steiner suggested, could be by reaching an early agreement on the free trade agreement (FTA) between India and the European Union (EU).
“The FTA is not just about one sector or industry but includes a very vast area of economy of both India and the EU,” Steiner said.
“I expect the FTA to come into effect soon if the political will on both sides is strong enough to reach an agreement.”