Amid fears that a stalled reform agenda had tarnished its investment allure, the government announced a programme aimed at liberalizing the rules for foreign direct investment (FDI) in the country.
The new regulations permit foreign investors to purchase a maximum 49% stake in domestic airline carriers and 51% in retail industry. Further measures include a cut in diesel fuel subsidies and the selling of government stakes in state-owned enterprises (SOEs).
The reforms are in part an attempt to tackle the rising current-account deficit, which reached 4.1% of GDP in 2011/12. In addition, a declining rupee, rising inflation expected to average 7.0% to 7.5% in 2012/13, according to ICRA and a moderation in economic growth are all factors leaving Indias credit rating in a vulnerable position.
Given these developments, India is courting foreign capital to boost the rupee and plug the current-account gap.
A recent report by Asiamoney has argued: India has a poor track record of following through on reforms and policy changes. Such was the case in November when parliamentary interference caused delays on FDI announcements on multi-brand retail reforms. Standard & Poors, which rates India BBB- said in June that inefficient policy implementation could result in a junk rating.
In many ways, therefore, the decision by S&P and Fitch to downgrade Indias credit rating to negative in June was a pre-cursor to the market reforms recently initiated.
This time around, the government and wider business community are beginning to realize that the successful implementation of these market reforms will form a central component in reviving Indias economic competitiveness and bringing about much needed investment.
However, will Indias economic reforms be enough to safeguard its fiscal credit worthiness? Euromoney pieces together the views across different institutions:
India has been consistent with the reform implementation. [It has] taken a very measured approach to reforms recently, which is going to detract some of the risks and concerns people have about Indias overall economy.
[With regard to Indias public finances], the deficit will stay in place but will be manageable. Correcting these long-standing deficits and imbalances is probably not at the forefront of Indias agenda, as they need to spend a lot of money on infrastructure, and other development projects and social policies. The government understands it has the capacity in the economy to grow going forward.
[As for country risk], I am very optimistic about India, given the government is working on long-term capacity of Indias economy to grow. Fluctuations in market news and in market sentiment can go either way but we need to look at Indias long-term capacity, which remains very strong, and that is the reason why I am optimistic about it. Institute of International Finance reforms have been positively received by financial markets and lifted business confidence.
Initiatives to contain subsidies, attract foreign investment and alleviate structural impediments were positively received by financial markets. It has also lifted business sentiment. The stock market rose 7% between the end of August and late September. The rupee rebounded to Rs53/$1 from Rs55.5/$1 at the end of August and a record low of Rs57.3/$1 in late June.
The structural reforms should give a lift to the economy over the near term, but the scope for stimulus is still constrained by high inflation and large current-account and budget
deficits. Although the central bank cut reserve requirements in mid-September to inject liquidity, it held the policy rate at 8%. In the second half of the fiscal year ending March 2013, the central bank may lower the policy rate at most by 50 basis points, starting with a 25bp cut on October 31. A gradual pick-up in activity should bring real GDP growth to 6% in 2012/13 and around 7% in 2013/14. Deutsche Bank: Market reforms a step in the right direction into tackling the countrys fiscal deficit.
Euromoney Country Risk Indias overall ECR rebounds from Q2.
The reforms are necessary but will be difficult to implement in full. India has been going through a rough patch, with growth slowing more sharply than expected. Real GDP growth for FY12/13 is now likely to come in at 6% year-on-year at best, down from 6.9% in FY11/12 and a sharp drop from 9.6% in FY10/11. This has posed many challenges to keeping a budget target of a fiscal deficit at 5.1% of GDP. The immediate challenges are risks of roll-back and then execution risks.
A rapid political backlash occurred when the Trinamool Congress (TMC), the ruling coalitions second-largest party, announced it was withdrawing from the government. While the coalition is not facing an immediate threat of collapse, it is now more vulnerable. If other parties follow TMCs move, the Congress Party will be forced to consider partial roll-backs. In addition, the past record of government divestment of SOEs suggests there are execution risks and that revenue may disappoint.
All in all, the push for reform is commendable and should go some way to helping fiscal consolidation. While the defined fiscal target of 5.1% may not necessarily be achieved, the overshoot should not be as large as in FY 11/12.
India, ranked 59 on ECRs global rankings, has experienced increased risk since Q1 2012, despite its ECR score rebounding marginally from Q2 a sign that market reforms are perhaps paying off. India is ranked second lowest [on ECRs rankings] among the Bric nations, with only Russia lagging behind the sub-continent.
Indias overall ECR score has fallen by 1.3 points since Q1 2012, to 52.9 in September. The sovereigns economic-assessment score deteriorated the furthest, dropping by 1.7 points across this period. Scores across all of Indias economic sub-factors have deteriorated since Q1 2012, bar its employment indicator, which improved by 0.3 points.
Of particular concern to ECR economists are the countrys government finances and monetary policy/currency stability indicators, reflecting the high inflation and large current-account and budget deficit that have affected its economic momentum negatively.
On the political spectrum, the sovereigns government-stability score has weakened considerably, falling by 0.4 points since Q1 2012, to 5.0 in September. In addition, the countrys corruption indicator at 2.8 points remains considerably low for an emerging economic power.
This has left Indias ECR score witnessing the second-largest score decrease since September 2010, after China.
This article originally appeared on Euromoney Country Risk.