Fitch Shocker

Fitch chooses not to upgrade India’s sovereign ratings

After Moody’s had upgraded India’s sovereign rating, it was expected that Fitch may follow suit. However, Fitch decided to maintain status quo and retained India’s rating at the lowest Investment Grade category of BBB-. This rating must be seen as an update after the issues pertaining to higher oil prices, weak fiscal numbers, and key governance issues. Let us understand why this is important?

Fiscal concerns

One of the principal concerns raised by Fitch pertains to the weakening fiscal situation. The government in its latest budget had allowed the fiscal deficit targets under the FRBM to spill over by 30 basis points. This was maintained consistently for the financial years 2017-18 and for 2018-19. With the elections coming up, Fitch expects that the pressure on the fiscal deficit will continue to mount. The higher MSP at 150% of production cost guaranteed to farmers will also be a big drain on the fiscal situation. Additionally, Fitch has also expressed its concerns about the rising prices of crude oil globally. More so, since India currently imports 2/3rd of its oil requirements and is one of the worst hit by the recent crude rally! In addition, Fitch has also expressed concerns over the rising fiscal deficits of the state governments, which is not fully factored in the central fiscal deficit. The unwillingness to upgrade the rating has largely to do with the fiscal concerns.

Governance issues critical

NPAs were already an issue when Moody’s upgraded India’s sovereign rating. It was hoped that the initiative to recapitalize banks would work in their favor. Two incidents have queered the pitch since then. Firstly, the PNB fiasco and the audacity with which promoters could filch money from the bank and skip town, has become a big concern. Fitch has expressed concerns that these types of problems could be hiding in the balance sheets of a lot of other banks. Secondly, the real issue of governance has arisen post the ICICI case. Here there was a clear case of conflict of interest between the extension of a loan to Videocon Industries, the eventual default and the considerations given to the CEO’s relatives. Fitch has expressed its dissatisfaction over the way this issue was handled by the RBI and the bank at the expense of the shareholders.

Government debt

Fitch has also expressed concerns over government debt at 69% of GDP. This is sharply higher than the median ratio of 41% for typical BBB countries. The Fitch rating is critical because it comes as an update after some key changes pertaining to fiscal management and corporate governance standards. This is an opportunity to the government to take stock of the situation on the ground. Fitch has not painted a pretty picture of the Indian economy! ©

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