Fitch cuts India retail outlook to negative

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Global ratings agency Fitch has cut the outlook for India's vast retail sector from stable to negative, saying consumer spending was at its weakest in seven years.

The Fitch announcement on Monday was a new blow to the Congress-led government, already struggling to revive an economy growing at its slowest pace in nearly a decade.

Analysts have been betting on strong retail and financial services sector performances as India's 1.2 billion people move towards a more Western-style consumer economy.

But the slowing economy and high borrowing costs have brought "a sustained deterioration in the discretionary spending ability", the ratings agency said.

India's once-booming economy grew by just 5.3 percent between January and March -- its slowest annual quarterly expansion in nine years.

The Fitch outlook covers the second half of 2012.

It comes two months after Fitch downgraded its overall credit outlook for India from stable to negative, saying the nation's prized investment grade rating was at risk from flagging growth and spiralling deficits.

Fitch said consumer spending was unlikely to pick up unless consumer price inflation, now running at over 10 percent, comes down significantly and buyers receive a "significant raise in real wages".

The funding needs of most retailers are likely to increase, driven by store expansions and potentially longer inventory periods, the report added, while a worsening business climate could hit "credit profiles of retailers".

It said retail sales had been muted so far this year and stores now are discounting goods, eroding profit margins.

The ratings agency said allowing supermarkets such as Wal-Mart to enter India's estimated $470 retail billion industry could provide retailers easier access to foreign investment and have a "positive impact" on their finances.

India's government has allowed foreign brands such as Adidas to open 100-percent owned shops.

But it has continued to block the entry of supermarkets amid parliamentary opposition and protests from small shopkeepers who dominate the retail landscape and fear loss of jobs.