Thumbnail: 

Fitch Ratings reiterates that it expects a cyclical slowdown rather than a structural downturn for India, following the Central Statistics Office's advanced estimate of national income Tuesday.

The Indian government's advanced estimates of 2011-2012 GDP show a growth rate of 6.9%, down from 8.4% in 2010-2011, confirming that the country is experiencing a sharp slowdown.

The slowdown probably reflects the authorities' efforts to correct an overheating economy. Last year we revised our real GDP forecast for India in 2012 to 7.0% from 7.5%. The cyclical downturn could help further ease inflation, which appears to have passed its peak. This will give the Indian central bank room to move to a more accommodative monetary policy, after recent increases in policy rates.

In addition, recent increases in India's PMI data suggests that manufacturing sector activity may be close to bottoming out.

The Indian government's estimates suggest that GDP growth in the second half of the fiscal year will be around 6.5%, down from 7.3% in the first. We maintain our view that India is not facing a structural deterioration in its potential growth rate of 7.5%-8.5%.

India's economic growth has been one of its stand-out features and remains a key support for its 'BBB-' rating with Stable Outlook. The country's potential growth rate is well above the 'BBB' category median. From 2006 to 2010, its actual growth rate was more than 2x the 'BBB' median.

India's ratings would benefit from structural fiscal reform that led to a strong improvement in the fiscal deficit and general government debt ratios, and from an improvement in the investment climate and a sharp, sustained fall in inflation.

MORE ARTICLES ON ECONOMIC OUTLOOK

Quote Image: