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, says Fitch Ratings. Broader concerns regarding the weak and inconsistent regulatory framework remain.
These concerns will remain material for economic performance ahead of elections in 2014, weighing on the sovereign credit profile. Fitch assigned Negative Outlooks to India's 'BBB-' ratings in June 2012. We await evidence of implementation of the measures on the ground and will also look to see how the economy reacts.
The government has increased the amount of foreign-direct investment permitted in a range of industries and, most importantly, has resolved its long-running dispute regarding multi-brand retail foreign-direct investment (FDI). This demonstrates some commitment to growth-enhancing reforms despite recent political deadlock.
The compromise on retail FDI is to hand over approvals to individual states. These can now grant approval to multi-brand FDI of up to 51% in cities with a population over 1m as long as at least half of the foreign investment goes toward back-end infrastructure, such as manufacturing, design and distribution. Large states including Delhi, Maharashtra and Andhra Pradesh have already said they will approve such investments.
New rules also allow for an increase in foreign ownership in the power sector. Fixing the poor financial condition of utilities so that they can upgrade infrastructure and improve operating performance is important in addressing a capacity constraint on the Indian economy's growth potential.
The government has also altered fuel subsidies so that there is less of a difference between the price of diesel and petrol and the subsidy is more accurately directed at the poor. If implemented fully, these measures should help contain the fiscal cost of fuel subsidies this fiscal year, although India's budget remains exposed to commodity prices more broadly through food and fuel subsidy programmes. Fitch projects the government deficit at 5.7% in the year to March 2013, missing the budget target of 5.1%.
Recent measures have mainly focused on economic growth and haven't added clarity to the government's plans regarding its own balance sheet and fiscal consolidation. Some plans, such as asset sales, appear insufficient to reach the government's target. The government approved the sale of around 10% of four companies to raise INR150bn (USD2.8bn). This will leave the government the clear majority owner of all these companies and only raises half of the budgeted target for the next fiscal year of INR300bn. Fitch believes prospects for meaningful action on fiscal consolidation before the general election in 2014 are limited.