FDI reform measures a major macroeconomic reform: Fitch Ratings

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Chennai: Citing the liberalisation of foreign direct investment (FDI) rules by the central government on November 11, credit rating agency Fitch Ratings termed it a significant structural macroeconomic reform.

In a statement issued on Thursday, Fitch Ratings said: “This, together with an earlier announced plan to restore the financial viability of the country’s power distribution companies (discoms), indicates that India’s reform momentum remains intact.”

According to Fitch Ratings, the key changes in the FDI regime announced by the central government include upping the limit for FDI approvals from the Foreign Investment Promotion Board (FIPB) to Rs.50 billion from Rs.30 billion; increasing foreign-investor limits in several sectors including private banks, defence and non-news entertainment media; and allowing property developers to sell completed projects to foreign investors without lock-in periods.

As per the package for the power discoms, Fitch Ratings said the state owned power distribution utilities that opt for the package will see 76 percent of their debt transferred to states.

The balance 25 percent will be issued as state-guaranteed discom bonds.

This would happen after an agreement is singed between the power companies, the union ministry of power and the state governments.

“This could lead to higher general government debt of up to two percent of GDP (gross domestic product) but this is not sufficiently significant to have an effect on India’s ratings, especially with the potential positive longer-term effects of the reforms,” Fitch Ratings said.

“Importantly, the reforms create an incentive structure for state governments to reduce losses at discoms by requiring the state governments to assume a certain share of losses at these entities,” the agency said.

According to Fitch Ratings, these changes align with the government’s broad-based reform agenda and should support investment and real GDP growth over the long term.

“We forecast Indian real GDP growth to come in at 7.5 percent this year and accelerate to 8.0 percent in 2016 and 2017,” Fitch Ratings said.

However, other big reforms such as the implementation of a national value added tax, will require a two-thirds approval in the legislature and face stiffer political obstacles, Fitch Ratings said.

According to it, the passage of goods and service tax bill is important for the Indian economy as it would diminish the inter-state trade barriers.